Herb Denenberg Column for September 3, 2001.


You've seen the ads warning the public about insurance fraud. Some television ads show those who perpetrated this crime behind bars. There are endless organizations publicizing insurance fraud, explaining how it costs you money, and how it can be a risky crime to commit. Organizations of insurance professionals, including the Chartered Property and Casualty Underwriters, run campaigns against insurance fraud. There is even a Fraud Prevention Week in June. Insurance textbooks include a discussion of insurance fraud, and how it hurts both insurance companies and policyholders. The media produce a stream of reports on insurance frauds, with insurance companies often cooperating with the media, by producing undercover video of insurance fraud being perpetrated.


But there's another form of insurance fraud and abuse that's just as extensive, just as expensive, and, in a sense, even more outrageous and offensive. But you don't see much about it in the media, in insurance company mailings and brochures, and on television ads. There are no organizations to fight it. And you don't see the culprits going to jail and they rarely do.


I'm talking about the form of insurance fraud that's not talked about, reported on, or constantly denounced - the kind committed by insurance companies and their claims adjusters, their lawyers, their claims examiners, and their other personnel. It consists of denying a meritorious claim, or needlessly delaying payment, or asking for unnecessary substantiation or doing anything else to intentionally thwart a fair and efficient claims consideration or other insurer decision.


In some ways, insurance fraud committed by insurance companies is even more reprehensible than policyholder and claimant fraud. Insurance companies and agents are licensed by the state. They have a fiduciary duty to policyholders and claimants. They proclaim they are subject to the highest ethical standards. But they are often as dishonest and fraudulent as some of their often denounced policyholders. So they are often both frauds and hypocrites.


Consider how easy it is to commit insurance fraud. Even insurance textbooks admit that policies are unread and unreadable. According to Vaughan and Vaughan, Fundamentals of Risk and Insurance (8th edition): "In most cases, the customer is asked to purchase a product in which he or she becomes a party to a contract that he or she has not read nor would understand if it were read." That is almost an open invitation to fraud. When selling the contract or when paying claims under it, insurance personnel know that the buyer or claimant may be at their mercy. Claims adjusters, anxious to make a record by denying claims, have a field day. Insurance agents, anxious to earn commissions, can also join the field day in puffing and misrepresenting policies.


Consider also the strength and weaknesses of the parties. On the one hand, you have an insurance company, with armies of experts and boxcars full of money. On the other hand, you have a claimant, who may not be well advised, who knows little about insurance or the policy in question, and who can't afford legal battles and long delays. But to an insurance company, a legal battle is just another routine cost of doing business. It has lawyers in house and all over its operating territory. If it denies a claim, it's can be in a win-win situation. There's a good chance the claimant will give up and go away. Even if the claimant protests and appeals to higher levels of management or goes to the state insurance commissioner, the insurance company can then pay and has the benefit of the claimant's money sitting in the bank in the meantime. Even if the claimant hires a lawyer and sues, the insurer can then settle. Only in exceptional cases (when an attorney takes the case, proves that the insurance company acted in bad faith, and wins an award of punitive damages for the claimant), improper decisions by the company can be profitable for the company.


Critics of the insurance industry, such as Eugene Anderson of New York, New York, who specializes in suing insurance company, says insurers often commit the mass crime of insurance fraud by routinely denying claims, knowing most claimants will go away or at worse, will be paid later rather than sooner. Anderson calls that nullification of the contract. Sometimes there is no such organized effort to deny claims. But improper claims handling, sometimes by overly aggressive claims adjusters bent on denying claims and acting on their own, can still create a kind of mass nullification of the contract.


Once in awhile, as noted above, insurers are made to pay for improper sales or claims denials. Perhaps the most celebrated examples are the multi-million and billion dollar cases brought against life insurers in the 1980s and 1990s for improper marketing tactics. In those cases, brought against most of the major life insurers, both compensatory and punitive damages were assessed. But that kind of fraud had been going on for decades and nothing was done about it. What's more, abuses are still commonplace, and often nothing is done about them.


My point is that both sides of the insurance fraud question ought to get public attention and there ought to be remedies in both cases. But there aren't. For example, insurance commissioners ought to do more to stamp out the insurance fraud perpetrated by insurance companies. But they don't do much. After all, most commissioners come out of the industry and go back to it when there terms end. They are more interested in pleasing their future employers than the people they are supposed to protect. They are closer to lapdogs and puppets of the industry rather than protectors of policyholders and claimants.


There should also be an "Insurer Fraud Authority" to fight insurer fraud just as there are so many bodies fighting insurance fraud by policyholders and claimants, but not by insurers. Another frequently proposed and always rejected proposal is an Insurance Consumer Advocate to protect the rights of policyholders before the office of the insurance commissioner.


Those two proposals aren't likely to fly, so here are a few methods of protecting yourself from insurance fraud by insurers:


(1). Select high quality companies with good reputations and top financial ratings. They are less likely to engage in arbitrary claims denials and other forms of insurance fraud.


(2). If you use an insurance agent select that agent with the same care you'd use in selecting a doctor or lawyer. A good agent can do many things including protecting you from insurance fraud.


(3). To the extent possible, know your coverage. The more you know, the less likely is the insurer to take advantage of you. If you have questions, you can get advice from a variety of sources including your state's insurance department.


(4). If you have any doubt about a claims denial or other insurance company decision, get a second opinion. You can ask for reconsideration; you can appeal to a higher level of management, such as the President of the company; you can ask a consumer protection agency or your state's insurance department to investigate the matter.


(5). If all else fails, consider legal action either in small claims court on your own, or get legal advice.


(6). Beware of proposals for "tort reform." They are typically drafted by tobacco companies and other humanitarian organizations whose purpose is to make it more difficulty for policyholders, claimants and others to protect their rights.


(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

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