Although the specter of organized crime rings receives the brunt of the publicity, the proliferation of "garden variety" insurance fraud continues to badger insurance companies.In their efforts to implement best-practices claims management, fraud and buildup (the inflation of an otherwise legitimate claim) added between $4.3 billion and $5.8 billion to auto injury settlements in 2002, representing between 11% and 15% of all dollars paid for private passenger auto injury insurance claims that year.

Diverse participation

The findings were produced as part of a study commissioned by Malvern, Pa.-based The Insurance Research Council (IRC), a division of the American Institute for CPCU and the Insurance Institute of America.

While these fraud figures are significant, insurers appear to be making headway in combating this condition: The same study performed by IRC in 1992 found that fraud and buildup added between 17% and 20% of total claims dollars paid in 1992.

"This study demonstrates that a few extra dollars padded onto individual insurance claims can collectively add up to a significant amount of money," says Elizabeth A. Sprinkel, senior vice president of IRC, a non-profit organization that provides educational programs, professional certification and research for property/casualty insurers.

"The improvement in dollars lost to fraud and buildup since 1992 suggests that insurer fraud-fighting efforts are having an influence. However, the costs of claim abuse remain high and ultimately result in more expensive auto insurance for customers," Sprinkel adds.

The study, entitled "Fraud and Buildup in Auto Injury Insurance Claims: 2004 Edition," examined detailed claim information from 72,354 claims that closed with payments in 2002.

The appearance of fraud-defined as the misrepresentation of key facts of claims-was found in almost one in 10 paid bodily injury liability (BI) claims and one in 20 paid personal injury protection (PIP) claims. Nearly one in five paid bodily injury claims and one in eight paid personal injury protection claims involved the appearance of buildup.

Although insurance fraud incidents often focus on organized fraud rings, planned fraud accounted for just 3% of the excess payments for fraud and buildup. Opportunistic fraud, such as the report of fictitious injuries from legitimate accidents, and other types of fraud accounted for one-half of excess BI payments and 40% of excess PIP payments. Many of these incidents involve the work of individuals acting alone-or perhaps in association with attorneys and medical providers.

"IRC research has shown that insurers have become more sophisticated, and consider fraud to be a serious problem, and putting time, effort and resources into fighting fraud is a priority," states Sprinkel. "We also have seen that an alarming number of people believe it's OK to pad a claim in certain circumstances."

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