WHAT INSURANCE COMPANIES AND MEDIA USUALLY OVERLOOK: THERE ARE TWO
KINDS OF INSURANCE FRAUD: BY CLAIMANTS AND BY INSURANCE COMPANIES.
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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