Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Richard Schwartz has quite the resume:

I worked 15 years in the Fire Department as a Fire Fighter/Paramedic and eventually became shift commander. I worked combat as well as investigation and inspection duties. In January of 1986, I opted out of public sector employment and started by career as a private Fire Origin and Cause Investigator working mostly for the insurance and legal community. The job caused me to travel throughout the Southern United States, Caribbean and Central and South America. I also worked for a forensic engineering company and eventually opened my own forensic engineering company from June of 1994 through October 2005.

Richard’s experience working with insurance companies on various fire investigations gave him an insider’s view of how many insurance carriers rely on special investigative units (SIU) in connection with claims.

SIU in the beginning:

Schwartz remembers how SIU assisted insurance companies decades ago.

SIU worked collectively at reducing the large increase in fraudulent auto claims. Back then, police departments were undermanned and concentrated on the drug crimes and cocaine cowboys. They would not perform follow up investigation on the suspicious accidents. Many claims included a crash with a car always carrying 4 people that would smash into a fixed object like a concrete pole, but they would claim that a mystery vehicle hit and ran from the scene, leaving 2 to 4 victims with back injuries. SIU, working in conjunction with DFS Department of Insurance Fraud and DOI staff, put the cases together.

SIU became larger and now plays a role in all facets of the insurance claims process, from investigating information provided on applications, first report of claims, field recorded statements, EUOs and so on. SIU now gets involved on any claim at any time, depending on who requests their involvement.

Prior to the SIU, insurance adjusters and private investigators would conduct the investigations. This would entail adjusters performing some work and also obtaining approval to spend carrier dollars which would not be freely authorized.

The evolution of SIU

With respect to property damage claims, Richard explains what has evolved:

Nowadays, SIU can be brought in at any stage of the claim process. For instance, when an insured reports a simple water loss, if the field adjuster arrives and finds anything suspicious or even something as little as PA involvement, some carriers  assign SIU to gather details and give protected information to law enforcement. Most SIU personnel are former law enforcement and their files ARE NOT PART OF THE INSURANCE ADJUSTER’S FILES. In some cases, they may even be an outside company, so there is separation between the adjuster file and the SIU file.

Sometimes, SIU can be assigned because a particular contractor or PA who has done battle with the carrier is involved. Sometimes, a simple kitchen fire brings about a full investigation. In part because years ago, there was a series of suspicious kitchen fires. 

.... intentional damage escalation is fraud, and that is what the carrier is looking for. Carriers use SIU investigations to delay the claim process. Remember, as long as law enforcement is investigating or not issuing a report, the SIU investigation is still open and the claim investigation is considered to be open. Neat how that works!

Investigation length and extent was usually a business decision. For instance on marine claims, especially with Lloyds, hoursor weeks could be spent, depending on the information developed and whether that information was favorable to the carrier. However, if information was developed that indicated the carrier would have to pay, investigations were shut down, and in most cases, left unfinished. Dollars controlled what was being spent. The only real exception to the rule was State Farm. If they had a small loss but felt that it was fraud, the sky was the limit.

Why Richard no longer works as a fire investigator for insurance companies:

In the spring of 2005, I felt the need to change careers. I never figured out which specific case it was, but in general it was a definite “AH HA Moment.” After undergoing a series of depositions, I learned how certain carriers would take a portion or excerpt from my report and represent it to the insured as the findings of the report. This resulted in certain disclaimers being added to my reports, and like a magic wind blowing in, certain clients who used my services for years, stopped. I realized it was time to move on, as I would not be a part of this new demand to issue reports that were other than the truth.

In the spring of 2005, I embarked on my newest career as a Public Insurance Adjuster with The BCH Group, Inc. This allowed me to use my Fire Department experience and my 19 ½ years of private investigation, fire and explosion analysis and forensic engineering work to assist policyholders with their insurance claims.

To learn more about The BCH Group, visit the website here.

Let's set the stage for how this happens. After a theft or a fire, the insurance company adjuster comes to the loss. One of the items orally requested from the policyholder is a list of all the lost, stolen or destroyed personal property along with all receipts. Exactly what is said becomes a major issue and some of my clients in the past have indicated that they did not make a claim for personal property items because the insurance adjuster said they had to have receipts to verify ownership, value, age, etc. Sometimes, my clients hear the instructions and think they are required to have receipts or they will not get paid.

I have always felt that the proper instruction from an honest insurance adjuster knowing that most people do not keep records or receipts of their covered "stuff" is:

The insurance policy allows us to ask for all the documents you have that help verify the loss. If you have any receipts for the items you are claiming, I would like to see those originals. If I need a copy, I will pay you for the cost of the copy. Please do not think that you have to have a receipt of the purchase of any personal property item you are making claim for, but if you do, I have to see it as soon as possible. Regarding your purchase of replacement items for those that are lost, the policy does require you to keep those documents of purchase and those receipts. You have to keep those post-loss purchase receipts as a condition under the policy to get replacement cost benefits."

(Note: In Florida, a homeowner insured with an admitted carrier gets replacement cost of personal property right away, so that instruction is not entirely accurate in Florida.)

Some insurance adjusters fail to make the highlighted portion clear to the policyholder. Some policyholders fail to hear it. And as a result, invoices are made up or somehow obtained that are not the original but a fabrication. Special Investigative Unit (SIU) adjusters love this game of finding the fraudulent invoice. While I have no problem of them catching frauds, I hate when otherwise honest people are baited into a needless situation of committing a fraudulent act just to get what is already owed to them.

The Claims Magazine article could be such a case or it could be a case of a person trying to justify an intentionally inflated claim:

When Gayland Anthony Oliver suffered a structure fire to his Greensboro, N.C., home in May 2009, he is alleged to have used the opportunity to pad his claim with some pretty fancy duds.

...Oliver claimed that $8,100 in custom-tailored suits had been destroyed in the structure fire. However, State Farm Fire and Casualty Company found the claim suspicious and conducted an investigation. They discovered that the invoices submitted for payment were fraudulent and did not reflect the true cost of the suits.

Oliver was arrested for submitting false claims to his insurance company....

Corey Harris' post was accurate, but there are many of the same traps for the honest policyholder in the theft scenario. The insurance company has many valid reasons to require that the police are notified following a theft loss. Three of those are:

1. Theft is not only a crime against the owner, but one against society. Finding thieves and placing them behind bars helps everybody, including insurance companies and their customers.
2. The police often recover stolen items. To that extent, the recovery of stolen items mitigates the insurer's loss and if recovered soon enough, the policyholder's loss as well.
3. Theft always has a component of a moral risk to the insurer. A few policyholders stage, hide or otherwise claim that a loss occurred as a result of theft caused by a third party when it simply is not true. Unlike a natural disaster, there is always a possibility of fraudulent theft. The requirement to notify the police helps prevent such from occurring, increases the probability of finding it, and therefore reduces the "moral hazard."

The police may ask for a list of what was stolen and the "value" of those items. The important thing for the honest policyholder is to get a revised list to the police if either the items or values change so that the SIU guys do not start asking about discrepancies. They will often check, and they may inquire as to significant differences. If numerous items are stolen, most people will not realize what is missing until they conduct an inventory of what is left and try to remember what may be missing. Sometimes, people simply forget what items they owned or realize that items in another part of their structure were also stolen until they look for them. The important thing is to keep the insurance company and police informed and with the same information about the changes and why the changes are being made.

And always remember, two wrongs never make a right. Never make up an invoice and never claim more than the full value of an item just because the insurance company may threaten not to pay or pay enough. When the insurer does not conduct itself in the right manner, I bet you can guess the type of professional that should be called to do something about that.

Bill Gross is the most famous philatelist of United States stamps. He was supposed to be there as well, but he was pulled away to a last minute meeting with Alan Greenspan and Treasury Secretary Geithner on an allegedly more important endeavor--how to save the economy.

I know that collecting stamps seems a bit nerdy. But, when you consider that I also study insurance policies and read how obscure insurance clauses are legally interpreted, it makes a little more sense. As an adult, it is now a hobby usually done in solitude with a lot of study. Similarly, I find that most good lawyers spend a lot of time studying their area of practice in quiet reflection.

At this weekend's gathering, I met Dan Walker, treasurer of the American Philatelic Association. When he learned what I do for a living, he shared an experience he had when he owned an insurance company that specialized in insuring collectibles.

A collector insured Civil War items for approximately $2.5 million. He reported a burglary of his entire collection, and Dan felt something was wrong. He hired an attorney and a SIU (fraud) adjuster just to check out the circumstances. Apparently, the collector had recently suffered a severe medical setback with diabetes. They learned that he had approached several dealers trying to sell his collection. When those dealers heard the collection was stolen, they suggested that it might be a fraud because they found most of the items to be forgeries. The SIU investigator tracked down a storage facility that rented space to the collector just before the alleged burglary.

Eventually, the insurance case became a criminal matter, and the collector was convicted of insurance fraud.

Dan said it was a very desperate and sad story of a person being "duped" into purchasing allegedly valuable collectibles without doing enough investigation to determine the authenticity of the items. Collectibles insurance does not cover the loss of market value if one purchases a forgery.

Collectors should always get an independent appraisal and expertization before purchasing from a dealer or at auction. Some dealers and auctioneers advertise and promote items which are not authentic, damaged or altered. Dealers often make expert repairs which are difficult to detect and make the item appear pristine. Such alterations subtract significantly from value. Items sold on eBay are notorious for this.

So always follow this rule:

When buying something of value, get the expertization from a true expert not affiliated with the dealer or seller.

Sandy Burnette and Barry Zelma would be happy to hear that Dan’s SIU team did such a great job. There is a need for such trained attorneys and adjusters. My sense from Dan Walker was that this was a very unique situation. He indicated that it was the only time he ever had to go into a courtroom in his twenty-two year insurance career.

I wonder why an insurer like State Farm would spend so much money on advertising fraud detection. It cannot be to get people to buy State Farm policies. When you consider how few of their customers ever commit fraud, why would State Farm spend money on an advertising campaign about fraud?

For example, State Farm advertised that it provided arson dogs to investigators. I cannot imagine somebody reading that advertisement and saying, "Edna, let's go buy some State Farm insurance because they are out to get their customers that are arsonists." What is the real purpose of that advertising campaign?

Some may suggest that State Farm and others in the insurance fraud industry make up such advertisements and statistics to raise suspicion of everybody that makes a claim. Of course, those who determine the purpose of the advertising and make up the statistics are not about to reveal their motives. Consumers should question such insurance advertisements and the potential impact upon those receiving the message.

Still, none of those concerns and thoughts mean that there is not a significant need for the hard and important work of those that investigate and detect fraudulent insurance claims. It also does not mean that we need to consider every claimant a potential crook.

Let’s start with your analogy to 17th century witch-hunts. Suggesting that the investigation of suspected fraud by insurance companies is a “witch-hunt” is, to me, almost laughable. I realize your knowledge and experience with fraud investigators is limited to taking their depositions and challenging their findings, so I could hardly expect you to be objective about the individuals you make a living opposing, but your assessment of their abilities and their motivations is more than wrong, it is entirely unfounded.

The SIU investigators, private investigators and law enforcement investigators I have worked with for over 30 years are, with rare exception, among the finest, most ethical and most dedicated professionals I have ever met. (You might want to compare the number of fraud investigators implicated in corruption/dishonesty last year with the number of attorneys implicated in corruption/dishonesty. The numbers run about 100 to 1 for corrupt lawyers!) They work long hours under difficult—and sometimes dangerous—conditions to uncover the truth. When they do, their findings are challenged by the criminals they expose (and their lawyers) as being “biased”, “slanted”, ‘improper”, “incomplete” and even “untruthful.” When they testify in court, they will be called everything but an honest child. But for nearly all of them (Yes, there are always some bad apples in every barrel) they do it because they believe in their work and because they want to expose fraud in the interests of all of society. They don’t do it for the money, Chip. You have secretaries making more money than some of the fraud investigators I know. They don’t do it because they have some perverse interest in making false accusations to ruin the lives of innocent people, either. Most of them have more principle than the clergy I have met. They do it because they feel their work has a purpose and a value—to all of us. Ask yourself if what we have recently seen from the likes of Enron and Bernie Madoff suggests the uncovering of fraud is a worthwhile mission. I know how I feel about that.

When you call for “unshakable proof” of insurance fraud, are you suggesting some heightened standard of proof to uncover fraud? (Isn’t true proof “unshakable” by definition? I mean, is there such a thing as “shakable” proof?) Is there some social purpose in affording such protection to those who perpetrate insurance fraud? Should we give them greater protection than murderers and rapists, as if they merit some type of special protection? I would hope not!

Nobody wants to see an innocent person wrongly accused. Believe it or not, some of the people who feel most strongly about that are the same people you accuse of engaging in a “witch-hunt”. I have worked with many investigators who have gone out of their way to look for evidence which casts doubt on the suspicions of fraud, to pursue truth rather than seek evidence to support an accusation. But the sad truth is that insurance fraud in this country is not some “rare occurrence of fraud to justify an open season on policyholders” as you suggest, but is an epidemic of staggering proportions. When a national survey just a few years ago revealed that over 50% of the people in this country—the majority, for God’s sake!--think it is “okay” to pad an insurance claim to get back your deductible or recover some of the premium that has been paid “all these years,” we have a moral crisis on our hands. And after handling perhaps 5,000 fraud cases in my career, I can offer some first-hand testimony that the problem is real and the prevalence is rampant. Just from my own cases, I have proved fraud committed by persons from every walk of life—including CEOs, legislators, judges, clergy, accountants, lawyers, entertainers and professional athletes. Not to mention insurance contractors, adjusters and public adjusters in numbers which leave me shaking my head. Chip, insurance fraud is no “rare occurrence” in this country, it is a true epidemic.

When you say that “If all you concentrate upon in life is uncovering fraud, you may start seeing signs of it everywhere,” I beg to differ. When we go to a doctor, we want a specialist. When policyholders come to your firm, they want somebody who only concentrates upon your type of practice. (You wouldn’t want your law firm described as a place where “all they concentrate upon in life is uncovering bad faith, so that they see signs of it everywhere!”) And when insurance fraud is being investigated, I sure don’t want somebody doing it on a part-time basis, do you?

Your reference to the recent scientific developments in fire investigation and the suggestion “many innocent people were accused of arson” is a popular refrain in recent years, but it lacks any statistical basis in fact. Issues such as concrete spalling, depth of char analysis and flashover have certainly changed the way we look at a fire and the basis for determining the cause of a fire. But there were only a small number of cases where those issues were the determining basis for concluding a fire was arson. In almost all of the arson cases prosecuted over the past 50 years, they were only one small part of the proof. Those “bad cases” have drawn a lot of attention and deservedly so for the individuals wrongfully convicted. (Perhaps you saw me on CNN’s “Anderson Cooper 360” last year discussing this very point.) But to suggest there was some widespread misapplication of fire science so that hundreds or thousands of innocent people were wrongfully convicted of arson is just wrong, way wrong. There is absolutely no evidence of that on such a scale.

Chip, we all run the risk of developing “tunnel vision” from the work we do. I’m sure you and many others who visit your website feel that way about me. But after reading your blog, I have to tell you I fear you may have developed that affliction yourself when it comes to this issue. Insurance fraud is a threat to all of us. It drives up indemnity payments on claims, it causes tens of millions of dollars to be spent trying to uncover it, and in the end it hurts everybody when they go to pay their insurance premiums. And lest we forget, it is both legally and morally wrong. Rather than disparaging insurance fraud investigation, we should all be promoting and supporting it. I’ve spent my life doing just that and I plan to continue to do so. I would welcome your assistance, my friend.

--Sandy Burnette