Insurers often employ the phrase “insurance fraud” in conjunction with claim denial, legislative lobbying, and premium increase requests. But does the usage rate of this phrase correlate with the rate at which insurance fraud is actually committed? Put differently, is insurance fraud as rampant as insurers rampantly contend? Nope! A renowned, well-respected claims practice expert summed the situation up nicely at a deposition I defended not so long ago:
Q: In your opinion, [claims practice expert], is insurance fraud a problem in this country?
A: Yes and no.
Q: What do you mean when you say “yes”?
A: Any time you have fraudulent activity surrounding insurance claims transactions it tends to attack the integrity of the insurance mechanism and it tends to erode the underlying purposes for insurance transactions, so it’s not a desirable situation at all. So to the extent fraud exists at all it’s a problem and it’s a problem that I’ve pointed out many times existed more or less at the same level in 1962 that it does today. I think one of the unfortunate outgrowths of the problem of fraud, that is, the – let’s call it the notion of fraud in the abstract – is that it has basically created secondary problems such as definitions of the term and such as reliance on not so credible statistics so that we have a fraud issue that is relatively unchanged… but we have a huge change in the way people describe it and usually I mean in evocative terms. It’s a destabilizing issue in society, it’s a destabilizing issue in terms of jury trials where a party who perceives fraud and raises the hew and cry creates the general impression that fraud is rampant when it may not be.
Q: Do you have an opinion as to whether or not insurance fraud is a rampant problem in this country?
A: I do have an opinion.
Q: What is that opinion?
A: That it’s not.
Q: When you say that you don’t think insurance fraud is rampant in this country, what did you mean by that?
A: I went with an attorney to the home office of a major insurance carrier that writes personal lines insurance in connection with a fire loss and a person most knowledgeable; that is, a 30(b)(6) witness, was giving testimony and I was there to hear their testimony. And this person was the person most knowledgeable about the number of dollars paid as a result of fraud for essentially what amounts to the largest personal lines writer in America, and that person’s testimony was that not a dollar had been paid for fraud in the previous year or the year before that. And yet if one looks at the advertising and the reporting on individual situations and so forth, that same carrier was responsible for allegations that not only was insurance fraud rampant but that the fraudulent claims were being paid at huge costs and that everybody in America is suffering a hidden tax or something of that nature by virtue of payment to fraudulent claimants. I was struck by the disparity of these competing views. So what I meant by that and by giving you that example that there’s a bit of a disconnect right now in terms of quantifying insurance fraud because of lack of credible statistics on insurance fraud and skewing of the record by characterizing any activity as fraud that may equally bear some other nomenclature, so I think to have rampant fraud you would have to be able to demonstrate that a significant societal trend would have to be indicated and that insurance fraud would have to be an index crime in the Uniform Crime Report before you could basically call it rampant.
The notion of rampant insurance fraud should be challenged in the courtroom. Practitioners should make use of things like motions to strike allegations of insurance fraud plaguing society or motions in limine to exclude evidence, testimony, argument, and inference relating to such allegations. Legislative reform and premium increases should not result from naked assertions of insurance fraud; politicians and insurance commissioners should request and carefully consider credible evidence regarding the frequency of insurance fraud, the dollar amounts actually paid by insurers to fraudulent claimants, shrinking insurance company profit margins as a result of insurance fraud, and the like.