Everyone knows the numbers by heart: Insurance fraud costs property/casualty carriers an estimated $27 billion each year, or roughly 10% of premiums collected.The tricky part is detecting fraud so that some of those losses can be redirected to the bottom line. In the world of auto repair, fraud rears its head higher during dicey economic times like now when folks are hurting for money.
To meet this challenge, Farmers Insurance Group has changed the operating philosophy of its special investigations unit 180 degrees, from "reactive" to "proactive." The nation's third-largest personal lines property and casualty insurance group has initiated a host of strategic steps to take the profit out of fraud, especially in the area of auto-repair.
It has launched its most aggressive approach to auto-repair fraud in California because the state legislature there recently enacted a statute specifically aimed at combating insurance fraud.
"Under the statute we can file a whistle-blower lawsuit that allows us to go after triple damages if we prove fraud, much like a civil version of the Racketeer Influenced and Corrupt Organizations Act (RICO)," says Doug Ashbridge, director of special investigations for the Los Angeles-based Farmers Insurance Group.
"It's a double-edged sword for the person committing this type of fraud. We go after them and their assets, and law enforcement can initiate a criminal investigation," says Ashbridge, CPCU, GCA.
In mid-2002, Farmers filed two major actions using California's novel anti-fraud statute. The carrier served summons and complaints on a Contra Costa County body shop and its owners, accusing them of taking part in a large-scale scheme designed to defraud Farmers' policyholders.
In the suit the carrier details how the body shop and its owners allegedly billed Farmers for services that were never rendered, for inflated repair costs and for phony repair invoices. "We are determined to take the profit out of fraud. It is unfair to honest individuals to pay for the actions of a few dishonest people," Ashbridge says.
The Contra Costa County suit seeks more than $1 million against the repair shop that allegedly inflated invoices up to three times the actual services rendered and billed for services never provided.
Last December, Farmers again took action-this time against an Oakland body shop and a Ventura county body shop, their owners, former Farmers employees and other co-conspirators-accusing them of taking part in a large-scale scheme designed to defraud policyholders. The action also takes advantage of California's anti-fraud statute. It seeks more than $12 million in damages and injunctions to prevent the defendants from victimizing others in the future.
In the second case, Farmers uncovered 82 fraudulent acts because its employees noticed a pattern of suspicious claims coming from one repair service over a two-year period.
The investigation discovered a complex scheme of vehicles first being involved in vandalism claims, followed by a claim where the vehicle swerved to miss a hazard, striking parked cars.
The suits all allege that the defendants were involved in "paper losses," where bills were submitted for nonexistent damage and repairs and inflated damages. All the cases involved switching the vehicle identification numbers (VINs) and license plates to conceal past claims using the same cars.
As part of its aggressive approach to fraud, Farmers has formed a total of 11 special investigation teams in the United States.
One of those special investigation units targets general automotive-repair fraud cases.
Each special auto unit has a fraud investigator trained extensively in civil and criminal fraud cases, and that person is teamed with a certified auto-repair expert. The automotive experts-who can take a car apart and put it back together-develop the forensic information required in fraud cases.
The carrier also uses fraud audits, claims personnel and complaints from customers to detect phony practices in the auto-repair business.
"We hire the auto repair experts because they know the vehicles inside and out," explains Ashbridge. "We develop the forensic information using photography, vehicle inspections and diagnostic equipment to determine whether or not there is an inconsistency between the repair bill and what was actually repaired or not repaired," he adds.
Sending a message
Once that's done, the fraud investigator takes statements from the uninsured, the repair shop and other sources of information. If the investigators believe that they have provable fraud, the information is presented to Farmers' legal panel.
If the panel verifies the existence of fraud, the carrier moves ahead with its civil suit and also reports it to law enforcement or a state fraud division that may pursue a possible criminal case.
"We had always done bits and pieces of this targeted fraud program," explains Ashbridge. "Whereas we were once reactive to fraud, now we are very proactive to it. The team members receive extensive training in civil and criminal fraud investigators both in-house and at the National Crime Bureau Academy," he adds.
In the past, "if our claims handlers happened to see something out of the ordinary, they reported it but the effort wasn't well defined," Ashbridge explains.
"Today, we have 120 fraud investigators and 11 targeted teams assigned to the Special Investigations Unit. One special unit is assigned to auto-repair fraud."
The new aggressive approach to automotive repair fraud "sends a message to the auto repair shops and owners," says Ashbridge.
"We believe we have seen a decline in this type of fraud because of our efforts," he adds. "Can we put numbers on that-that's virtually impossible. As our (investigative teams) go out and look at cars and at repair shops, we're seeing a downward trend in fraud-at least as it affects Farmers.
"Another benefit of the program is that we get money back because we are serious when we file these lawsuits. Farmers has recovered substantial sums of money from people who have ripped the system off," he says.
A flexible program
The more aggressive program also benefits the carrier because it helps the investigators get better at what they are doing. "We are able to train our people a little bit better than in the past because with each one of these cases, we learn a bit more," says Ashbridge.
In Ashbridge's viewpoint, it's a very solid deterrent when you combine criminal and civil actions-like Farmers is doing in the state of California with the new whistle-blowers statute. "We are seeing examples of prosecutors (in California) who are very willing to put people in jail. We're serious about this, and sending people to jail shows that we mean business," Ashbridge says.
Overall, Farmers measures the benefits of its fraud detection programs in terms of the dollars recovered and the elimination of exposure of its policyholders to dishonest shops in the future.
Also, claims handling protocols improve as a result of what the carrier learns from its experiences and future losses within a sector like auto-repair are deterred when Farmer's anti-crime publicity spreads.
Farmers Insurance is working to migrate California-type laws to other states and is working within existing common law and regulatory statutes in states that don't have whistle-blower legislation as of yet, according to Ashbridge.
In states without California's tough statute, Farmers can file common-law fraud suits. It can take the common-law cases to court and it also can turn it into a criminal proceeding and seek restitution that way.
Farmers Insurance and other carriers do face the hurdle of competing for prosecutorial resources in all fraud cases. That's because white-collar crime tends to fall lower on the totem pole than violent crimes or terrorism.
"The focus of our special investigation efforts is always changing," points out Ashbridge. "Fraud goes in waves. If auto-repair fraud is decreasing, we see an increase in bodily-injury fraud. That's why I like to keep my SIU program as flexible as I can so that when I see the trends changing, we can refocus our energy into areas where we are suffering more losses."
Brian S. Moskal is a business and financial writer based in Chicago.
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