Information for today’s claims professionals
Busted! A Look at the State of Adjusting and Fraud
Sneaky Payoff The Need for a Strong Analytical Unit
Fraud in the Art World Would You Believe?
ADHD’s Role in Claims SCHIP: The Compliance Headache
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Contents in this issue summer 2009
Plan now for influencing your legislature on insurance fraud laws.
Court orders on property claims can give you precedents to work from.
By Howard Goldblatt
By Robert T. Horst, ESQ., Mark H. Rosenberg and John J. McHale
Paper Tigers with Teeth!
Order in the Court
Coalition Against Insurance Fraud
22 Busted! Technology helps adjusters establish claims’ legitimacy and flush out fraud. By Dave Willis
Insurance IntelligenceAnalyze This!
Would You Believe...?
Integrate your company’s inner self to achieve deep claims analysis.
It’s time for adjusters to get smart on the actual prevalence of fraudulent By Adam Featherling, CFE, CIFI, SCLA & claims. Nick Bogdan, CIFI
By Elise M. Farnham, CPCU, ARM, AIM, CPIW
Is Attention-Deficit/ Hyperactivity Being Overlooked?
Intellectual Property, Fraud and Social Networking: A Perfect Liability Storm?
By Dr. Steven Carter, Psyd, lp Expert advantage
By jonathan faber luminary group, llc
cover: brand x pictures/Getty Images
CLAIMS ADVISOR | SUMMER 2009
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Contents in this issue, contâ€™d... summer 2009
Sneaky Payoff Business fraudsters can get away with more than adjusters might think. By Robert D. Jones, CBM, CFE RGL forensics
Risk A Verse Claims professionals can help riskcontrol counterparts just by telling a few stories. By Ken Nogan, MS, CSP
The Compliance Headache
Claims compliance standards are getting stickier with the addition of Medicare, Medicaid, and SCHIP Extension Act.
Shades of Grey How one art consultant finds clarity in the murky world of art claims.
By John V. Dâ€™Alusio
Fine ARts Claims Consulting, INc.
By PJ Zadok
in every issue summer 2009
Edit: Letter from the Editor
Using general cost models for identifying and understanding areas of difference between estimates. By Bradley D. Sharp, BA, AIC GuideOne Insurance
Pulse: Your Responses to Our Online Polls
Interview: What Makes You Tick?
Write: Tips for Better Writing
Event: Calendar of Industry Meetings
Source: Advertiser Directory
Story: Claims Adjuster Musings
CLAIMS ADVISOR | SUMMER 2009
Edit Nothing New Under the Sun A recent Wall Street Journal article highlighted one of the latest ways people are coming up with to cheat their way out of debt. It’s called “friendly” fraud, and it’s confounding online companies from sporting goods retailers to jewelry merchants which have seen a 50% increase in the past year. When money gets tight, people get desperate…and creative. Sanjay Sarathy, senior vice president of marketing for Vindicia, Inc., a California-based company that makes software to combat online fraud, says that many people think of friendly fraud as “an easy way to reduce the amount they owe their credit card company.” How it works is simple. Customers order products and then send back empty boxes, lesser merchandise or, in some cases, rocks in order to get a credit card refund they don’t deserve. Others claim they never received the product, leaving the merchant in a pickle. Companies can dispute the claim and possibly lose a good customer or take the financial hit. Sadly, it is getting increasingly difficult to distinguish between legitimate problems and would-be criminals. Analyzing computer records for repeat offenders and photographing every package before shipment has reduced the problem for many companies. One retailer even teamed up with local police to resolve the problem of a “missing” $9,000 diamond necklace. For these online retailers, stepping up their game is the only solution. The same is true in the insurance industry. Whether the answer is better technology or education or both, the need is clear. Identifying fraud is a must for insurance companies to remain competitive and solvent.
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Though there is some dispute as to whether or not insurance fraud is on the rise and how much money it costs carriers each year, adjusters are definitely questioning more as they deal with consumers who may be looking for a way out of their financial turmoil. It follows that adjusters need to become not only better educated to determine legitimate cases versus those worthy of closer scrutiny, but more savvy with the tools that help them determine fraudulent cases as well. From art to employees to technology and more, in this issue we continue to build awareness by looking at different aspects and sources of fraud. Fraud is prevalent whether it’s on the rise or not. Taking it down a notch is critical to your company’s bottom line and its competitive position in the future. Be sure to keep up on new developments and ensure your role as a valuable player in the game. King Solomon once said there is nothing new under the sun, and fraudsters prove that every day. However, there are both new developments in technology and ways to educate yourself so that you’re ready for whatever new spin on an old trick that comes your way. Until next time...
Information for today’s claims professionals
Summer 2009 VOLUME 3. NUMBER 3
Publisher & Editor Bevrlee J. Lipsemail@example.com Editorial Advisory Board Steven Carter
Glenn T. Gibson
Crawford & Company International
PowerGen Claims LLC
James R. Jones
Katie School of Insurance and Financial Services, Illinois State University
Robert Kelso Thomas W. Mallin John McHale Donna J. Popow
Kightlinger and Gray Property Loss Research Bureau Erie Insurance American Institute for CPCU/ Insurance Institute of America
Claims Advisor Staff Managing Editor/Maureen Latimer Contributing Writer/Dave Willis VP Finance/Michael Marsh VP Information Technology/Michael Kay Web Site Associate/Chris Walters Project Associate/Amanda Pierce Warren Editorial Assistant/Paige Kay Database Associate/Sheila Hoyer Database Associate/Teresa Baran-Carlson Design Assistant/Ashley Jones Design Assistant/Richard Shivers Human Resources/Shannon White Advertising Sales
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Volume 3, Number 3, Claims Advisor (ISSN 1940-0993) is published four times a year in January, April, July and October by Claims Advisor, 537 Deltona Boulevard, Deltona, FL 32725. Printed in the U.S. Copyright © 2009 by Claims Advisor. All rights reserved. Reproduction in whole or in part without permission is strictly prohibited. No charge for subscriptions to qualified claims adjusters and professionals. Annual rate for subscriptions to nonqualified individuals is $46 USD. Canadian $70 (in U.S. funds). For individual issues, $12 USD. For reprints, e-mail the editor at firstname.lastname@example.org POSTMASTER: Send address changes to Claims Advisor, 537 Deltona Blvd., Deltona, FL 32725.
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Regional Adjusters Conferences & Expositions Eastern: June 24 - 25
The Westin Providence Hotel & Rhode Island Convention Center Providence, RI Central: September 9 - 10 The Westin Lombard Yorktown Center Lombard, IL Western: October 20 - 21 Renaissance Austin Hotel Austin, TX These conferences are geared to front-line adjusters, supervisors, and managers and are held in three easy-to-reach locations. The conferences include 28 property and casualty insurance topics that provide up-to-date information on critical claims issues. Approximately 700 insurance professionals attend each Regional Adjusters Conference.
Large Loss Conference
2010 Claims Conference & Insurance Services Expo
November 2 - 4 Tampa Marriott Waterside Tampa, FL
March 21 - 24 San Antonio Marriott Rivercenter & Henry B. Gonzalez Convention Center San Antonio, TX
This Conference explores claims issues associated with the largest property and casualty losses. The audience includes general adjusters, EGAs, large loss claims managers, and service providers who work with them to effectively adjust these claims of $100,000 or more. Workshops include personal lines property, commercial lines property, and casualty claims.
Attend the industry's largest educational conference and expo, hosted in 2010 in San Antonio. More than 100 educational sessions addressing the wide expanse of adjusting challenges will be offered, including adjusting property, business interruption, casualty claims, large loss, property coverage, claims management, special investigation/fraud, subrogation, and technology. The Insurance Services Expo offers an opportunity to visit with and compare the offerings of the country's leading property and casualty insurance service providers. Meet us at the Claims Conference & Expo where you'll discuss and connect with the major issues, resources, and players in the claims industry.
The exposition includes 80 regionally focused service providers with claims-specific services and expertise, beneficial to developing valuable contacts and networking with industry peers.
For more information and to register, please visit www.plrb.org, or call 630-724-2200.
CLAIMS ADVISOR | SUMMER 2009
Paper Tige with Teet Plan now for influencing your legislature on insurance fraud laws.
Quick Look C
State legislatures are distracted by budgetary demands and need prodding to focus on insurance fraud.
Claims professionals are well suited to aid in the drafting and passage of anti-fraud laws.
Prepare now to shepherd legislation through your capitol in the 2010 session.
By Howard Goldblatt
Most state legislatures have shut down for the year. In many cases, lawmakers are returning to their “regular” homes and jobs until their statehouses reopen next winter. Adjusters who want to have an impact on fraud by pushing for laws with teeth now have several months to design initiatives for 2010. This is the critical time to plan for success. Legislation is the backbone of fraud fighting. Prosecutors are more likely to take on fraud cases when they have strong laws by which to convict miscreants, and tough sentences serve as effective deterrents— the big win for insurers. Equally important, legislative activism can elevate the visibility and public image of adjusters as professionals who are fighting for the greater good of society. Involvement also creates a platform for educating the public, legislators and your clients about what you do and how your work benefits consumers. Most state legislatures are trying to balance their shaky state budgets. This overrides the importance of most bills of any kind because legislators have only so much time for non-budget issues. Thus, fewer fraud bills than normal
have been passed this year, so adjusters should have a solid action plan ready when statehouse doors start opening next winter. There will be no time for ad-libbing.
Some Issues at Hand While each state has its own set of hot-button insurance issues for the legislature to contend with, a few are getting broad-based attention and can aid adjusters and investigators nationwide. Maryland made being an unlicensed public adjuster an act of insurance fraud, but those who hold licenses in other fields also can act as schemers when they ply their trade in unscrupulous manners. Such “ambulance chasers” are on the verge of being restricted from accessing automobile accident reports in Texas through a law passed at the end of the 2009 legislative session this spring. By containing the dissemination of auto accident information, the state hopes to prevent lawyers, chiropractors and other medical professionals from recruiting often-unsuspecting accident victims into schemes to make fake injury claims against auto insurers. The bill awaited the governor’s signature at press time.
Another approach that could add potency to the anti-fraud arsenal is to require drivers to sign affidavits of loss for claims of car theft. The goal is to make would-be insurance schemers think twice before lying that someone stole their vehicle. Currently, claimants in many jurisdictions are not required to sign, under penalty of perjury and associated criminal prosecutions, that the information they are providing on a claimed auto theft is true. Arizona, Louisiana, Massachusetts and some agencies in Florida and Michigan have required affidavits, and Miami-Dade has reported a 6.5% drop in auto theft rates since implementing the requirement. On the health front, prescription-monitoring programs can aid in identifying claims fraud. These can vary in detail, but, at their most basic, they cut down on prescription abuse and resale by using a statewide database to crossmatch pharmacies, doctors and consumers on numbers and types of prescriptions. HIPAA has a law enforcement carve-out, so there shouldn’t be a problem with federal privacy infractions.
How to Lobby Claims advisors can make a difference in passing fraud legislation. Your credibility as an insurance claims professional can translate into a lobbying strength. A complete political planning guide would fill several encyclopedias, but here are 11 steps to success: 1. Form a leadership group. Create a planning council. These are the committed, politically astute adjusters who will form your legislative leadership. Keep it reasonably lean to allow swift decision-making. 2. Identify gaps in fraud laws. Determine the gaps in your state’s fraud laws. Does a fraud law need overhauling or just tweaking? Is an entirely new law needed? Have you seen a problem with owner give-ups, auto rate evasion, workers’ comp premium fraud or another scheme? 3. Draft your bill. Have your proposed bill, or at least detailed talking points, in place before approaching potential bill sponsors. Groups such as the Coalition Against
CLAIMS ADVISOR | SUMMER 2009
Insurance Fraud Is Not a Victimless Crime Who hasn’t equated the losses from insurance fraud with profits, bottom lines and premiums? But there’s another, even more compelling story of victims of insurance fraud—a story that gets nearly no publicity, a story that in some cases is almost too gruesome to read. It’s the story of children who suffer at the hands of adults committing insurance fraud. Children often are disposable props to help make scams work, and other times they simply are caught in the wrong place at the wrong time. When you are lobbying in the legislature or the press, don’t forget that the horrid truth can be a potent force of change. Here are some of their stories.
Leo Lopez and Elsa Moure stuffed their six-year-old son into a car, then rammed another car in a staged accident in Lawrence, Mass. They’d planned for the child to pretend he was hurt and make bogus injury claims through a shady clinic. But the boy was injured for real and ended up in the hospital. The child also lost his dad for nearly a year when Lopez received nine months for the scam. Members of the Gipson family also used children as young as age seven for props in staged accidents in Ft. Smith, Ark. Adults carefully coached them on how to act hurt. Few insurers would challenge an injured child, they reasoned. But one parent took realism to a new level by hitting a boy in the head to create a real injury.
Nobody tried to hurt two-year-old Joanna Lopez during a setup crash on the Long Beach, Calif., freeway. Two insurance swindlers just didn’t care what happened to her. The conmen braked their car, trying to maneuver a big rig into rear-ending them so they could make bogus claims. A car driven by Joanna’s parents was crushed between the frantically braking rig and another rig behind them. She and her entire family died in the flaming wreck. In another con, Timothy and Deborah Nicholls were deeply in debt to a drug-dealing motorcycle gang. Timothy’s home-framing business also was failing, and the Colorado Springs, Colo., couple saw only one way out: Torch their home for insurance money. Timothy didn’t care what happened to their three children. He sprinkled lighter fluid on their pajamas, and the couple left them to die in the blaze. They received life in prison. Meanwhile, five-year-old Brandon Dillbeck thought he was getting routine teeth cleaning at a North Carolina dental clinic. But the dentist strapped him to a board, then drilled and replaced 16 teeth with stainless steel caps during a two-hour ordeal. The clinic used Brandon to make inflated claims for worthless dental treatment. The clinic owners paid $10 million to settle a variety of charges. Insurance fraud is far from a nameless, faceless crime. Let the legislatures and the public know that anti-fraud legislation does more than reduce losses. Behind the numbers are real victims, and often they’re the littlest ones.
Insurance Fraud can assist with drafting. Research the issue. What evidence supports the need for your bill? How many people might be victimized by targeted schemes—especially in the sponsor’s district? How will they be harmed? Any loss figures? Also, gather compelling, real-life cases. Enlist bill sponsors. Do your homework. Make sure possible sponsors have clout and commitment. Do they have a history of support for fraud or other crime bills? Do they have the ear of key committees? Are they on key committees? Also see if anyone on your planning council knows potential sponsors through past personal or legislative dealings. Learn the legislative leaders. Know the doorways into the legislature. What committees decide which fraud bills reach the statehouse floor? You’ll probably also need companion bills in two chambers, such as a senate and assembly. Tap local insurance groups. Seek to involve insurer state/regional government affairs offices and insurer associations (e.g., American Insurance Association), insurance federations or councils, and agent/broker associations. They should know the political climate well. Enlist other allies. The more groups that throw their weight behind your bill, the more likely that legislators will listen. Consider seeking the buyin of your state insurance department, fraud bureau,
attorney general’s office and local prosecutors. 9. Tap national experts. National groups can provide valuable support throughout your campaign. Reach out to experienced groups such as the Coalition Against Insurance Fraud, the National Insurance Crime Bureau and the National Association of Insurance Commissioners for advice and practical tools. 10. Promote your bill. Send news releases and backgrounders to reporters, and consider a news conference. Line up compelling data and memorable examples. But note: Some bill sponsors prefer to maneuver quietly behind the scenes. Work this out in advance. 11. Educate legislators. This should be ongoing, not just one lobbying campaign. Invite key legislators to discuss fraud issues at association chapter meetings. Have them tour insurer facilities and talk with other adjusters. Take part in legislative days held by insurance groups in state capitols, or consider holding one yourself. With adequate planning and targeted information, claims professionals can make a significant imprint on state laws, and even national legislation, that make investigating claims and identifying fraud activity easier and that permit or mandate effective penalties for cA insurance fraud. Howard Goldblatt is director of Government Affairs for the Coalition Against Insurance Fraud. He can be reached at (202) 393.7332 or howard@ insurancefraud.org.
By Michael Kelly
Quick Look C
Special investigation units can provide deep claims analysis that indicates precursors to fraud and systemic problems that enable it.
Access to data and communication across company units is key to a successful investigation.
Quantifying the value of a deeper SIU intelligence effort can promote management buy-in and support.
Integrate your company’s inner self to achieve deep claims analysis. By Adam Featherling, CFE, CIFI, SCLA and Nick Bogdan, CIFI
It’s the 21st Century, the Age of Information, in which everything you ever wanted to know about anyone or anything is available at a keystroke. So why is it so hard to integrate companywide and industry-wide data to identify patterns of and precursors to fraud? A couple of key words come to mind: silos, reactive, incommunicative. What is a smart insurer to do? As they say: Knowledge is power. Knowing where and how to access information is the backbone of intelligence analysis and a vital part of a successful special claims investiga-
tion unit. Additionally, analyzing the information internally can provide cost savings and a real return on investment to insurance companies. Instead of paring SIU operating budgets and staff or outsourcing special investigations, companies can leverage their existing investigation units or build intelligence programs to become integrated, proactive and communicative. An effective intelligence analysis operation can make sense of disparate data and turn it into actionable information. Being proactive is the first step. Proactively generating field referrals
can be a challenge given the cost of data-mining tools and training, but it’s a step that yields results—hard results—such as a return on investment of beyond 9:1. Proactive SIUs can generate in excess of 20% in total field referrals. The key is to find actionable intelligence and avoid “holy grail” searching. Finding actionable intelligence requires access to multiple data sources: claims, underwriting, point of sale, and vendor data, such as medical bill review and auto parts suppliers. The great challenge, however, is overcoming the “stovepipe” or “silo” business unit men-
tality present in almost every company. Combine that with multiple and incompatible data management systems and substandard reporting capabilities, and you have a chronic anemia that afflicts claims investigation. Companies must learn to think and act “globally,” at least within the company itself. The SIU operation need no longer be limited to operating reactively to field requests for assistance. It can be the bridge linking company business units into a strong business partnership unified in combating/ deterring insurance fraud. To motivate management to
CLAIMS ADVISOR | SUMMER 2009
support this new, proactive, integrated approach, take a deep dive into the numbers and identify the bleeding that results from not beefing up the SIU. Speak the corporate language of profit and loss. Communication on such issues is usually best done in person, but at the very least it should be done via WebEx (real time) so the correct interpretations and recommendations can be made and answers can be supplied immediately. Just forwarding a report full of numbers could result in unwanted, undesired and even incorrect interpretations of the data and breakdowns. A Practical Matter How would an SIU operation transition from reactive to proactive? For example, a suspicious claim referral is generated to the SIU field operation, and a successful resolution is realized. Rather than shelving the investigation as a closed file, an intelligence analysis could review the attributes unique to that case with an eye to its evolution and its application to other cases. New information flows into investigative units periodically but somewhat irregularly, so proactive
efforts are best when they are automated. Any program that is utilized should have the ability to comb through new incoming data on a daily basis and notify the analyst automatically when predetermined information has been identified. If this capability is not available, utilizing a canned but manual report on a weekly or biweekly basis is your best shot. Running reports with a lag time of five to 10 business days is a problem stemming from a claims department’s cycle time in turning over claims. By analyzing the data in depth and in an ongoing fashion as more data become available—yes, even after a case is “closed” —the SIU can make a clearer assessment of where the systemic problems are and what corrections and improvements need to be made. It can determine what breakdowns occurred that should have been identified at the point of sale, underwriting level, and claim level. Furthermore, the analysis could clearly articulate what those breakdowns cost the insurance company in losses. Recommendations would be made
to each of those departments to correct the breakdowns. The recommendations and subsequent corrections should be completed in the form of an official project with formal proposals, timelines and compliance action reports. These are best conducted by a project manager and pushed downstream rather than upstream. Analytic conclusions from one case can be applied in an intelligence model for future use, but each case has to be redefined or calibrated to some degree because each claim is unique. True unit-wide intelligence analysis must be a company policy. Quality results are possible only with full access to all data sources traditionally held solely by one business unit or another. SIU intelligence analysis must compile data from all internal unit resources in order to generate an operational overview beneficial to all business partners. By interacting “globally” and identifying shortfalls from broker through adjuster, the intelligence unit and the entire SIU program will prove itself cost effec-
tive and provide a measurable return on investment. Good old-fashioned number crunching will help quantify success. Declines in a department’s true expenses or better savings or improved loss costs can all be measured. Benchmarking improvements year over year will also show the sustained value of the proactive approach. A lower overall loss ratio for the company should result from an invigorated SIU, and that can be illustrated as data are quantified. The key is getting management buy-in and support to knock down those barriers to data access and integrated communication. Then the SIU itself has to make in-depth, quality hindsight and analysis a living practice and quantify the results to prove its worth and benchmark its own progress over time. cA Adam Featherling, CFE, CIFI, SCLA, is the national SIU director for Safe Auto Insurance, and Nick Bogdan, CIFI, is the major case director for Nationwide.
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ADHD in adults can be overlooked as the cause behind claims for post-event distress.
Investigation of claimants’ medical and behavioral history must be pursued to validate claims.
ADHD can present as brain damage, so evaluating the traumatic event in light of historical evidence is key.
By Steven Carter, PsyD, LP
Claimants demand that insurers pay for a wide variety of mental disorders and neuropsychological impairments that were allegedly caused by an insured event. The equitable resolution of these claims requires that other explanations be excluded. One commonly overlooked possibility, particularly in adults, is Attention-Deficit/ Hyperactivity Disorder. Believing that they have permanent brain injury when, in fact, they have a treatable mental disorder does not help claim-
ants. Moreover, the financial compensation is wasted when it is spent on treatments for the wrong disorder. A basic familiarity with the diagnostic criteria and types of ADHD will help in recognizing when it is potentially relevant to claims investigation. Although ADHD is a childhood developmental disorder, the symptoms frequently persist into adulthood.
ADHD is not new and not just “acting badly.” It causes neuropsychological impairments that can easily be mistaken for signs of brain damage unless a careful analysis of the claimant’s history and childhood medical records is performed. It is frequently
accompanied by comorbid mental disorders that can be mistakenly attributed to an insured event when, in fact, they are the result of living for years with ADHD. DSM-IV-TR Diagnostic Criteria for ADHD The Diagnostic and Statistical Manual of Mental Disorders, 4th Edition, Text Revision (DSM-IV-TR) contains the diagnostic criteria used in clinical settings. All of the DSM-IV-TR criteria must be present for a diagnosis of ADHD. For a valid diagnosis,
CLAIMS ADVISOR | SUMMER 2009
a claimant must exhibit the core symptoms of attention problems, hyperactivity/impulsiveness, or both. It is also necessary that: • Symptoms are present in more than one setting, such as home, school, or work, or in more than one relationship (e.g., parents and grandparents in children, or spouse and coworkers in adults). • Symptoms result in significant impairment in educational, social, or occupational functioning. • The core problems have been present for at least six months • The problems began before seven years of age. As yet, no medical screening tests, for example, electroencephalograms (EEGs), heavy metal concentration, thyroid, blood or organ imaging tests have proven to be useful as screening or diagnostic tools for ADHD. Their use should be dictated by specific medical indications, not by the possibility of ADHD. Currently, Independent
Medical Exam (IME) doctors must rely on rating scales and behavioral observations designed specifically for diagnosing ADHD. No other psychological, general intelligence, neuropsychological or personality tests are of proven value in the diagnosis of ADHD, but they might help exclude other mental disorders. DSM-IV-TR Types of ADHD Currently, the DSM system allows for the following diagnostic possibilities: • Attention-Deficit/Hyperactivity Disorder, Predominantly Inattentive Type • Attention-Deficit/Hyperactivity Disorder, Predominantly Hyperactive-Impulsive Type • Attention-Deficit/Hyperactivity Disorder, Combined Type • Attention-Deficit/Hyperactivity Disorder, Not Otherwise Specified (NOS) The NOS diagnosis is used for individuals whose symptoms and impairments meet the
diagnostic criteria for Attention-Deficit/Hyperactivity Disorder, Predominantly Inattentive Type, but whose age at onset is seven years old or older. It can also be used for individuals with clinically significant impairment who present with inattention, but a behavioral pattern marked by sluggishness, daydreaming, and hypoactivity rather than hyperactivity. The NOS diagnosis can be used for adult claimants when it is impossible to establish onset before seven years of age. ADHD Is Not New Many people think of ADHD as the latest excuse for selfish and impulsive behavior. In fact, ADHD is not new. It was first described around the start of the 20th century but then was largely lost from view as theories of environmental causes became paramount in the 1920s and dominated into the late 1960s. Then there was a shift away from perceiving children’s problems as merely a reflection of parenting and other situational variables
and towards stable “disorders” within the child, often with a contributing genetic or biological cause. The diagnosis of ADHD has been subjected to an enormous amount of scientific scrutiny regarding its reliability and validity as a disorder and the implications for etiology, treatment and prognosis. It has long been established as a legitimate mental disorder. ADHD Is Not Just ‘Acting Badly’ Heredity is the largest determinant of who will get ADHD. Twin and family studies show that heredity accounts for about 50% of the variance. Children of a parent with ADHD have a 50% likelihood of having ADHD. Among affected children, 8% of biologic parents and only 2% of adoptive parents also had ADHD. The biologic families of ADHD children have high rates of alcoholism, mood disorders, and antisocial personality. Ineffective parenting, bad neighborhoods, and other situational variables are not
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considered causes, but may exacerbate preexisting symptoms and genetic vulnerability. Other potential etiologic factors for ADHD include low birth weight, birth trauma, childhood traumatic brain injury, fetal alcohol syndrome, heavy metal poisoning, deficiencies of minerals and vitamins, sleep apnea, and prenatal nicotine exposure. ADHD Is a Developmental Disorder That Often Affects Adult Claimants Most recent studies indicate that a majority of children with ADHD will show core symptoms at least through adolescence and about half of the time into adulthood. Approximately 4% to 5% of adults have ADHD, making it one of the most common psychiatric disorders. Diagnosing ADHD in adult claimants can be dif-
ficult because many adults with ADHD have developed coping mechanisms and deny that their impairments exist. For example, a salesman takes pride in his heavy schedule of high-energy sales calls because they produce a lot of business, but he is tortured by his inability to sit still at home or even on vacation. Other adults with ADHDcaused hyperactivity choose careers where the impairment is practically part of the job description—emergency medicine physicians, professional cooks, or even many claims adjuster positions. ADHD Looks Like Brain Damage In the seventies, ADHD was called “minimal brain dysfunction,” and there is modern evidence that the old label was not far off the mark. An organic neuro-
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logical disorder involving the frontal lobes and the basal ganglia in the brain also has experimental support. Positron emission tomography (PET) scanning has demonstrated that adults with past and current histories of ADHD showed 8.1% lower levels of cerebral glucose metabolism than controls, with the greatest differences in the superior prefrontal cortex and the premotor areas. This can impair a claimant’s ability to plan, organize, pay attention to details and instructions, screen out irrelevant information, carry a plan through to completion, and avoid distractions. Quantitative electroencephalography (QEEG) also reveals changes in people with attention deficits. Excessive cortical slowing in prefrontal midline areas, with a decrease in posterior beta activity, might indicate under arousal and partially explain why stimulant medications are safe and effective treatments for ADHD. ADHD Causes Neuropsychological Impairments A recent study combined the findings from 104 measures and 50 standardized tests across 24 studies to determine differences in the neuropsychological functioning of adults with and without ADHD. The largest differences were found for verbal memory, focused attention, sustained attention, abstract verbal problem solving, and working memory. Smaller effects were found for executive functions, visual memory, and visual problem solving. These results are consistent with the hypothesis that the inattention symptoms more so than the hyperactivity symptoms of this disorder persist into adulthood.
Signs That ADHD Should Be Considered in an Adult Claimant Inattention • Difficulty completing tasks that require lengthy paperwork and reading • Ineffective time management • Difficulty finishing tasks (e.g., multiple partially repaired cars in yard, carpentry projects in house, or garden renovations) • Frequently loses forms related to claim • Forgets depositions and teleconferences Hyperactivity • Talks excessively • Conspicuous finger tapping and foot jiggling • Risky and adventurous activities during leisure time • Occupation that requires a frenetic work pace (e.g., cook, ER physician, sales) • Depression that quickly passes when a specific difficulty is resolved • Ordinary pressures of life are experienced as repetitive and never-ending crises Impulsivity • Intrudes on and interrupts others conversations and activities • Higher than average number of speeding citations, license suspensions, crashes, and crashes involving bodily injury • Failed attempts to complete vocational and college programs • Occupational achievement below expectations for intelligence • Impulsive job changes, major purchases, and long-distance moves • Interpersonal difficulties
in multiple settings due to shortlived relationships or loss of control (e.g., multiple divorces, domestic violence charges) Work and home tasks impetuously initiated without a plan for necessary materials, staffing and time
Other Commonly Seen Signs • Low self-esteem • Abuse of alcohol and other drugs • Heavy use of legal stimulants (e.g., caffeinated coffee, soda, “power” drinks, caffeine tablets) • Illegal stimulants (e.g., methamphetamine) • Use of illicitly acquired prescription stimulant medication (e.g., Ritalin, Adderall)
claimant with impulsivity due to brain A longitudinal history supplied by damage are nearly impossible to distin- outside observers is helpful in assigning guish without the benefit of extended the symptoms to the appropriate cause. observation by outside observers. ADHD symptoms usually are lifelong Dysthymia, a form of low level depresand less episodic than are those of cA sion that lasts at least two years, could comorbid disorders. be unconnected with the claimant’s undiagnosed ADHD or be the result Dr. Steven Carter, PsyD, LP, is CEO of of living for years with its frustrations. Expert Advantage® (www.Expert-AdSubstance abuse can be the claimant’s vantage.com), which provides medical way of coping with ADHD symptoms evidence analysis, independent examinaof restlessness and hyperactivity or a tions and testimony nationwide. He can way of coping with the trauma of an be reached at (218) 749-3107 or stevenMunters Ads-ClaimsAdvisor:DRS Ads_half island 2/22/08 3:06 PM Page insured event. email@example.com.
Childhood Medical Records Are Critical Though the diagnosis of ADHD in adults depends on verifying that symptoms first appeared in childhood, obtaining childhood recollections and early records is difficult. Reviewing childhood medical and school records is critical. Attempts should be made in any case where an adult claimant is exhibiting the above signs of adult ADHD but alleging that the problems were caused by an insured event that occurred during adulthood.
Whatever the damage, rest assured.
Outside Observers Critical Reports from persons familiar with the claimant (e.g., spouse, coworkers) will typically contain far more problems than the claimant will report. Outside observers will also often be the best sources of information about comorbid but non-proximally caused mental disorders that affect three of every four adults with ADHD. Mood disorders (major depression, bipolar disorder, and dysthymia), anxiety disorders, substance abuse, personality disorders and learning disabilities are the chief psychiatric comorbidities. Outside observers and pre-morbid medical records will often indicate evidence that signs and symptoms of these disorders long predated the insured event and followed a waxing and waning course that was not appreciably altered by proximally caused injuries. The recent reckless behavior of a claimant in the manic phase of bipolar disorder, a claimant with ADHD, and a
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CLAIMS ADVISOR | SUMMER 2009
Quick Look C
Fraudulent claims seem to rise when the economy declines.
Technology aids adjusters in spotting fraud and supporting estimates.
Instincts, developed over years of experience, give adjusters a sixth sense to spur claims inquiries.
Busted! Technology helps adjusters establish claims’ legitimacy and flush out fraud.
By Dave Willis
“People are facing, at the least, financial distress and, at most, financial ruin. This is a very powerful motivator for insurance fraud.” That’s the warning from Jim Quiggle, director of communications for Washington, D.C.-based Coalition Against Insurance Fraud, who says insurance fraud tends to spike during economic downturns. “Normally honest people, who wouldn’t steal a candy bar from a drugstore, are reflexively turning to insurance schemes to protect themselves from falling off a financial cliff.” All too often, he adds, people turn to insurance as an economic stimulus package and view insurance fraud as a harmless prank with no real victim other than the insurer.
“To many of these people, scamming an insurance company is a no-brainer,” Quiggle believes. “They’re thinking, ‘Heck, the insurer won’t miss the money. Nobody pays a price. I am being made whole, financially. So why not?’” Calculated crimes can rise, too, he says because “the recession creates opportunities for criminals to exploit others’ anxiety, vulnerability and desperation.” William Bokel, CFE, SCLA, chief investigator for the Maryland Insurance Administration’s Insurance Fraud Division, has seen an uptick, but not just in claims counts. “Common schemes are becoming more complex,” he says. His observation is largely limited to his region,
and the same holds true for his peers. That’s because few data are aggregated—anywhere. “Every county might have its fire marshals, but they don’t report to anybody else,” explains Bokel, who chairs the Association of Certified Fraud Examiners Maryland Chapter President’s Advisory Committee. They may turn arson investigations over to police. But again, no clearinghouse exists. Multiply the situation by 50, and take into account the absence of a national clearinghouse. “Nobody is actually keeping a firm tab on exactly what the numbers are,” Bokel says. Compounding the reported increases in fraud numbers and complexity
is the pressure on insurers to trim staff and operating expenses while still meeting demand for quality. Expectations are that claims will be adjusted quickly, says Marty Brown, president of Brown Adjustment Service in Fayetteville, Ark., and 2008-2009 president of the National Association of Independent Insurance Adjusters. That’s not just on the carrier’s part, either. “It’s become a pretty immediate world,” he adds. “Clients expect instant response, too.” Technology to the Rescue “With laptops, BlackBerrys, GPS units and everything else, we’re just go, go, go,” says Tim Middlebrook, claims management special-
CLAIMS ADVISOR | SUMMER 2009
Nixon & Company Incorporated, an independent adjusting firm and third party administrator headquartered in St. Louis, was recently called on to adjust a substantial loss. The carrier’s underwriting file was sparse, but within a couple of minutes, he got a picture of the building online and knew what to expect. Marty Brown also tapped the Web for a recent house fire claim he was working. He found a Web site where the homeowner documented the entire process of building the house and took credit for doing nearly all of the work. “While the owner claimed our guy had done something that led to the fire, the Web site told a different story,” Brown says. Because the house burned to the ground, it was tough reconstructing much on the scene, but when Brown showed up armed with pictures and accounts printed off the Web site, the liability issue was resolved. Nixon has found The Three Stooges Have Nothing Web searches also on Nicholas Di Puma come in handy for Di Puma’s house and auto were destroyed finding out if a propby fire. He says he was grilling steaks using four pans on his stove and had the erty is for sale— barbecue grill burning on his porch when something that’s not alcohol in the pans caught fire. He tried to put out the fire with a always mentioned dishrag, but the rag caught fire. So in the course of an instead, he threw one pan out the investigation. Brown front door. It landed in the back seat of his convertible and set adds, “Companies the car on fire. He tried to toss can even look at a out a second pan but tripped roof from the sky on a box. The pan landed on a leather couch, catching it on fire. The and give accurate judge somehow kept a straight face but measurements of it.” handed Di Puma five years of probation. Facebook, YouTube, Twitter and other community/social sites are finding their way into “Such technology used conversations—and investigato be ‘nice to have,’” says Paul tions. Brown cites attorneys DeMasi, MetLife assistant who found pictures on Facevice president for information book of supposedly injured technology, who supports MetLife Auto & Home. “Now, kids jumping off a wall. Web-based claim the hardware and software are management systems help ‘must-haves.’” Mark Nixon, president of adjusters meet challenges ist with Selective Insurance Company’s Northeast Region. Communication is anytime, anywhere. “If you’re out in the field, BlackBerrys get you online quickly. With a wireless laptop, just pull into a Dunkin’ Donuts or Starbucks, get connected, tap some keys quickly and get a report, even when you’re running between appointments. “We have access to much more data than even six or seven years ago,” he adds. While on the road, adjusters can now retrieve much of the information they can access from their own offices. Technology helps adjusters handle communication challenges better, too. “We can send text messages, call from anywhere, even shoot a picture of the site and send it on the spot,” Brown adds. Digital recorders and digital cameras also make the claims business run more quickly and more smoothly.
Drag Race Hoping to win tickets to tween pop sensation Hannah Montana’s concert, a Hartford, Conn., man donned a dress, wig, and high heels in a radio station-sponsored 40-yard dash. Apparently, when a local TV news crew covered the drag race, an alert viewer spotted workers’ comp claimant Garrett Dalton, 41, and blew the whistle. Dalton, a corrections officer, was arrested for workers’ comp fraud. As Hannah Montana’s album cover says, “I got nerve!”
by letting them handle claims anywhere. “It gives great supervision ability,” Nixon says. “We don’t need a paper file in our hands to review the status. We are able to manage and supervise it a lot better in real time.” Technology also feeds collaboration. Imaging allows all sorts of files to be transferred, DeMasi notes. “If you’re an experienced adjuster in New Jersey and I’m a rookie in Rhode Island, you could help me on a particular claim because now everything is in digital format. You could look at it along with me.” Middlebrook uses technology for back-and-forth with special investigation unit (SIU) staff. “They’re always ready to give us a hand,” he explains. “If something doesn’t look right or sound right, we give them a buzz and talk about it.” Often, the investigator on the other end of the line does a quick Web search to validate a hunch or rule something out. Carrier Initiatives At MetLife Auto & Home, collaboration may be getting easier. “Our chief claims officer is bullish on technology,” DeMasi says, “and welcomes with open arms anything that delivers a benefit.” Among the technologies the firm plans to deploy is an online community that lets staff interact better. Carriers are building out other functionality, too. “We have seen insurance carriers beginning to budget and allocate more money for claims technology than they have in the past,” Nixon says. Also in MetLife Auto & Home’s arsenal is software that identifies, up front, potential fraud. It takes available
information, analyzes it, and, if something doesn’t add up, it alerts the company’s SIU. “It’s a predictive analytics product,” DeMasi says. “We worked with our quantitative research group in modeling what is potential fraud.” Some claims are referred directly to the SIU for investigation. “For others, one or two more pieces of information might be needed to generate a more accurate score,” he adds. “In that case, a message goes to the adjuster, who does research and fills in the blanks.” Then it’s rescored. The company is also helping adjusters meet challenges by automating assignments and dispatch. “The software can schedule an adjuster’s day and optimize his or her route,” DeMasi notes. “If you’re going to adjust five or six claims during the day, we want to make sure they’re within an area you can handle. It takes the scheduling and routing process away from the adjuster.” Effective adoption of technology has, in large part, allowed adjusters to put their skills to work where they’re best suited. “We’re getting back to basics,” says Middlebrook. “These tools get us back to what we do best: adjusting claims—investigating, spending time to see if something looks suspicious.” Brown complements technology with workflow improvements and training. He
CLAIMS ADVISOR | SUMMER 2009
In the Hot Seat Then Off the Hook
a potential scam.” As the home crisis has erupted, desperate homeowners have been torching their houses for insurance money, especially as foreclosure looms, Quiggle notes. “Some people will dramatically raise their policy limits very shortly before torching the house in order to inflate the insurance payout.” On the auto side, one of the scams of this recession involves people ditching unwanted vehicles for insurance cash, Quiggle adds. Bokel says give-ups, as they’re called, have been increasing for several years. “Although the number of stolen vehicles is relatively the same in recent years, the number being recovered burned has increased dramatically since 2004,” he says. Bokel’s department investigators work with a task force in Baltimore and another in Washington, D.C., to combat give-ups. Too often, in the course of investigations, they run into communication snags. Problems continue to the prosecution stage. Bokel believes adjusters—his first line of defense—can help. “They are the ones interacting with claimants,” he explains. “They do a good job of picking up on the red flags.” Their suspicions, in most cases, turn into investigations.
An Erie County, N.Y., judge recently gave a man a $270 fine, five years of probation and random drug and alcohol testing after he pled guilty to attempted arson and reckless endangerment. Yes, the Bowmansville home renovator’s house burned to the ground, and he agreed that he tried to do it. Too bad that wasn’t enough for the judge to award the insurance company restitution. Why? He wasn’t prosecuted on fraud charges. Ouch.
currently employs an intern to help with paperwork, mounting photos, doing diagrams, picking up reports and other less technical parts of the business. This lets him focus his expertise on actual adjusting work. The association has a similar program underway. When things do require a second look, technology can augment adjuster expertise and instincts. “If you get something that even looks suspicious, you can search for information and get some background before you go off to a scene or a business,” Middlebrook says. “It can validate your instinct.” Still, instinct must be developed. “Instinct may make you a little more curious, but instinct is based on your experience,” Nixon says. “Without the experience, the instinct isn’t going to lead you to ask any further questions. You need a combination of instinct and experience to take you down the right road.” Cause for Suspicion This instinct—or curiosity, expertise or experience—is being called on more and more. Some carriers, Quiggle explains, have lowered the threshold for investigations. “It takes less to trigger a fraud investigation during a recession than it might during easier times,” he says. “This mandate gets passed down to the adjusters who are watching for the warning signals of
Just Keep Talking According to Bokel, adjuster interviews are vital to successful prosecutions down the road, especially if things proceed beyond the civil stage to criminal. A few tweaks, he believes, could boost prosecu-
tion success rates. Recorded interview setups represent one opportunity. “It’s easy to assume it’s the claimant they’re talking to,” he explains. To make statements most valuable, he suggests asking definitive, pointed questions. “Verify their identity. Maybe ask the last four digits of their Social Security number, the number they are calling from, where that number is located, whether it’s their residence or work, things like that.” The latter helps when venue issues arise. “If we are looking at the place of a crime, and then you play a recording of the contact giving false information, that’s a crime right there,” Bokel explains. On the auto side, law enforcement agencies have a short-list of pertinent questions Bokel encourages adjusters to ask. These help lock people into certain scenarios, he adds, which can be later verified or proven false. “This can determine how good of a criminal case you can make,” he notes. Such questions include: Who was the last person operating the vehicle? Did they have a key to the car when they used it? What kind of condition was the car in at the time? How many keys were there and can they all be accounted for? Do you have any idea who may have taken the vehicle? Are your payments up to date? Was the vehicle ready for repossession or have you been contacted by anybody for that? Have you been trying to sell your car? Were there any valuables in the car? “Most of these aren’t so pointed that they’d violate a company’s internal policy,” Bokel notes. Forensic examination of the recovered auto can
validate or refute the answers. Bokel also has a broader instruction. “When the hair on the back of your neck stands up, you’ve got something. Keep asking questions. Follow company policy, of course, but ask as many questions as you think are pertinent. As long as they are answering, keep talking.” Proper Perspective Brown notes that the majority of claims don’t involve fraud. “They’re just people making claims, and we’re there to help them through the process,” he says. “This is a people business. The adjuster—whether it’s a staff adjuster or an independent adjuster—is still the insurance company representative.” Workflow and technology improvements help adjusters, of course. But they, too, help customers. “These all cut the cycle time,” DeMasi says. “If we can turn things around more quickly and save a rental day, for instance, that keeps our expenses down. But the customer also gets the car back quicker.” Perhaps the greatest benefit—and for DeMasi, a key motivator—is how technology and workflow changes can improve work-life balance. “By removing or reducing administrative tasks, adjusters can do their assignments in a timely manner,” he explains. “That adds to customer satisfaction, of course, but it affects the adjuster’s work-life balance, too.” In the end, considering what seem to be increased demands from every side, the ability to maintain such a balance may be the biggest challenge adjusters cA face today. Dave Willis is a Claims Advisor contributing writer.
The National Insurance Crime Bureau suggests indicators that could point to potential fraud. Adjusters should keep an eye out for these when handling claims. Selected indicators, by line of business, include:
Workers’ Comp Fraud • • • • • •
Employee is disgruntled, soon-to-retire or facing imminent firing or layoff. Employee is involved in seasonal work that is about to end. Employee took unexplained or excessive time off prior to the claimed injury. Employee takes more time off than the claimed injury seems to warrant. Listed number is a mobile/cellular phone. Employee is a drifter and has a history of short-term employment.
Vehicle Theft Fraud • • • • • •
Vehicle is towed to an isolated yard at the owner’s request. Salvage yard or repair garage takes unusual interest in claim. Prior owner cannot be located. Vehicle is recovered totally burned after the theft. Fire damage is inconsistent with the loss description. VINs were removed prior to fire.
Homeowners Fraud • • • • • •
Insured contacts agent to verify coverage or extent of coverage prior to loss. Insured is overly pushy for a quick settlement. Insured is unusually knowledgeable regarding insurance terminology and the claims settlement process. Insured handles all business in person, thus avoiding the use of mail. Insured is willing to accept an inordinately small settlement rather than document all claim losses. Insured is recently separated or divorced.
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Commercial Fraud • • • • • •
Building is in deteriorating condition and/or lacks proper maintenance. Fire scene investigation suggests that property contents were heavily overinsured. Commercial losses include old or nonsaleable inventory or illegal chemicals and materials. Commercial fire occurs on holiday, weekend or when business is closed. Fire department reports fire cause is incendiary, suspicious or unknown. Fire alarm and/or sprinkler system failed to work at the time of loss.
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CLAIMS ADVISOR | SUMMER 2009
Court orders on property claims can give you precedents to work from. By Robert T. Horst, Esquire, Mark H. Rosenberg and John J. McHale
The last two years have seen a number of significant property insurance coverage decisions issued by courts throughout the United States. These opinions have addressed numerous issues that will likely be relevant in the analysis of first party property coverage decisions in the future, including the oft-discussed wind/flood distinction, consequential damages, ensuing loss, and the impact of a policyholder’s non-cooperation following a theft loss. Notably, the New York and California state courts have issued some influential opinions, while some Federal District Court opinions may prove to be persuasive and influential. This article will provide, in no particular order, a summary and discussion of these cases. Northrop Grumman v. Factory Mut. Ins. Co., 538 28
F.3d 1090 (9th Cir. 2008), opinion amended, 2009 WL 861475 (9th Cir. Apr. 2, 2009)—This matter concerned a policyholder’s claim that a standard flood exclusion in an excess commercial policy did not apply to losses caused by storm surges related to Hurricane Katrina. The policyholder specifically contended that while the primary policy at issue stated that the flood exclusion applied “whether [the flooding was] driven by wind or not,” the excess policy lacked such language, thereby creating an ambiguity. In rejecting this argument, the United States Court of Appeals for the Ninth Circuit noted that a storm surge fell within the “ordinary” meaning of the term “flood” as “an overflowing or inundation
of water over dry land.” Northrup Grumman, 538 F.3d at 1094. The court further held that the omission of the phrase “whether driven by wind or not” did not render the flood exclusion ambiguous, as the failure to include this phrase is “more indicative of a lack of specificity on [the insurer’s] part than an omission evidencing its intent to narrow its exclusion.” Id. at 1097. Accordingly, the Ninth Circuit reversed the trial court’s decision granting summary judgment in the policyholder’s favor. Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 87 Cal. Rptr. 3d 556 (4th Dist. 2009)—In this opinion affirming a punitive damages award in a bad faith case, a California appellate court analyzed whether the insurer could be held liable for such damages for the conduct of an independent claims adjuster, under the terms of a state statute providing that a corporation cannot be held liable for punitive damages for the conduct of an employee
unless the conduct was authorized by a managing agent. In holding that the independent claims adjuster could be deemed a “managing agent” for purposes of the punitive damages statute, the court emphasized the fact that the adjuster exercised “substantial discretionary authority” with regard to the claims handling decision, with no day-to-day oversight exercised by the insurer. Major, 87 Cal. Rptr. 3d at 576. Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187, 886 N.E.2d 127, 856 N.Y.S.2d 505 (2008)—In this case, the New York Court of Appeals examined whether a policyholder could recover consequential damages for an insurer’s purported bad faith handling of a claim under a commercial business interruptions policy, which allegedly resulted in the collapse of the policyholder’s business. The trial court and intermediate appellate court held that the insurer was not liable for such damages, given a policy provision which excluded coverage
Flood claims get attention from courts, with common sense and clarity in policy language prevailing.
Courts find against policyholders who deviate from their responsibilities as stated in their coverage.
CLAIMS ADVISOR | SUMMER 2009
for “consequential losses.” In reversing the trial court’s order granting summary judgment to the insurer on such grounds, the Court of Appeals emphasized that “[t]he purpose served by business interruption coverage cannot be clearer—to ensure that [the policyholder] had the financial support necessary to sustain its business operation in the event disaster occurred.” Bi-Economy, 886 N.E.2d at 131, 856 N.Y.S.2d at 509. Therefore, the court concluded that “the very purpose of business interpretation coverage would have made [the insurer] aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to [the policyholder] for the loss of its business as a result of the breach.” Bi-Economy, 886 N.E.2d at 132, 856 N.Y.S.2d at 510. The court further held that the policy exclusion for “consequential losses” did not apply, as these losses “clearly refer to delay caused by third-party actors or by the ‘[s]uspension, lapse or cancellation of any license, lease or contract,’” rather than those “additional damages caused by an insurer’s injurious conduct.” Id. (quoting policy language). The court therefore concluded that the policyholder should be allowed to pursue a claim of consequential damages, as such a claim “was reasonably
foreseeable and contemplated by the parties.” Bi-Economy, 886 N.E.2d at 133, 856 N.Y.S.2d at 511. Seaport Park Condominium v. Greater New York Mut. Ins. Co., 828 N.Y.S.2d 381 (A.D. 1 Dep’t 2007)—This case arose from an insurance claim for damage to a condominium building’s cooling tower. After the loss was reported, the property insurer retained an independent adjuster, who in turn retained an expert to examine the cooling tower and determine whether the damage was a covered loss. An initial inspection took place, which was attended by representatives of the policyholder as well as a representative
from the company hired by the policyholder to replace the cooling tower. Following the inspection, the expert determined that a more detailed examination of the cooling tower was required. Accordingly, the parties attending the inspection agreed that the cooling tower would be removed and preserved for further inspection. However, the cooling tower was subsequently destroyed, resulting in the denial of the claim. The policyholder brought suit against the insurer with regard to the claim. The trial court denied the insurer’s motion to dismiss, concluding that an issue of fact existed as to whether the company retained to replace the cooling tower was contractually obligated to preserve the tower for further inspection. In reversing the trial court’s decision, the Appellate Division of the New York Supreme Court held that the issue of whether this contractual obligation existed was irrelevant. Rather, the court emphasized that the insurance policy at issue contained language clearly obligating the policyholder to preserve damaged property if feasible and make it available for further inspection. As the policyholder had agreed to preserve the damaged cooling tower for further inspection, the court held that the disposal of the tower warranted denial of coverage. Latha Restaurant Corp. v. Tower Ins. Corp., 831 N.Y.S.2d 411 (A.D. 1 Dep’t 2007)—In this opinion, the Appellate Division of the New York Supreme Court affirmed the trial court’s order granting
summary judgment in an insurer’s favor and dismissing a commercial policyholder’s breach of contract action. The court’s determination was primarily based upon the fact that the policyholder’s “proof of loss statement included duplicative items, items in which it demonstrably had no insurable interest and a representation of loss attributable to…an expense it later admitted it never incurred.” Latha, 831 N.Y.S.2d at 412. The court held that such an “overvaluation of insured property” created a “presumption of fraud” which “becomes conclusive where, as here, the insurer demonstrates that the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation.” Id. Most notably, the court held that the policyholder’s “attempt to attribute the gross disparity here at issue solely to its public adjuster is unavailing under agency principles,” as “the adjuster was acting within the scope of [the policyholder’s] authority when he submitted the claims,” and the “plaintiff signed the sworn proof of loss.” Latha, 831 N.Y.S.2d at 412. Feinbloom v. American Intern. Ins. Co., Docket No. 276928, 2008 WL 1836563 (Mich. Ct. App. Apr. 24, 2008)—In this matter, the Michigan Court of Appeals analyzed the scope of a standard homeowners mold exclusion providing that no coverage under the policy would be provided for “‘any loss caused by rust, mold, rot, gradual deterioration or warping’” but established that coverage would be provided for “ensuing covered loss unless another exclusion applies.” Feinbloom, 2008 WL 1836563 at *2 (quoting policy language). The plaintiff policyholders contended that such language should be interpreted to provide coverage for mold that resulted from a covered loss: in the plaintiffs’ case, water damage following a flood. The court held that such language is “clear and unambiguous” and “unequivocally states that all losses due to mold are excluded from coverage under the policy.” Feinbloom, 2008 WL 1836563 at *2. The court rejected the policyholders’ contention that such
an interpretation of the policy would render the language providing coverage for “ensuing covered loss” meaningless. The court explained that, while the policy language established that mold damage was always excluded from coverage, the “ensuing covered loss” provision establishes coverage for other damage that may occur as a consequence of the mold, as long as such damage would not fall within another exclusionary clause. Accordingly, the court affirmed the trial court’s decision
to grant judgment as a matter of law in the insurer’s favor. Eckstein v. Cincinnati Ins. Co., Civ. Act. No. 5:05CV-043-M, 2007 WL 2894049 (W.D. Ky. Sep. 27, 2007)—In this case, the United States District Court for the Western District of Kentucky analyzed whether standard “ensuing loss” language in an exclusionary provision could be interpreted to provide coverage when the damage at issue is a covered loss but is nevertheless the result of an excluded risk. Although the court’s opinion does
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CLAIMS ADVISOR | SUMMER 2009
not cite the precise policy language at issue, such language likely mirrored policy language of cases cited in the opinion, excluding coverage for “[e]rrors in design, errors in processing, faulty workmanship or faulty materials, unless loss or damage from an insured Peril ensues and then only for such ensuing loss or damage.” Eckstein, 2007 WL 2894049, at *2 (citations and internal quotations omitted). In requesting that the trial court reconsider its prior decision denying
the defendant insurers’ motion for summary judgment on the coverage issues, the defendants contended that under such policy language, coverage for an “ensuing loss” would be provided only if the ensuing loss were the result of an intervening occurrence that occurred separately from the insured risk. Relying upon Sixth Circuit precedent, the court held that the policy language at issue was capable of more than one reasonable interpretation, including the
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interpretation that such language provides coverage for ensuing losses resulting from excluded risks. Accordingly, the trial court declined to reconsider its prior decision. Savage v. American Family Ins. Co., 178 Ohio App. 3d 154, 897 N.E.2d 195 (10 Dist. 2008)—In this matter, an Ohio appellate court examined whether a trial court properly granted summary judgment in an insurer’s favor in a lawsuit arising from the insurer’s failure to pay a claim for theft of personal property. Although the insurer had not denied the claim at the time the lawsuit was filed, it had not issued payment due to the policyholders’ failure to produce tax returns that the insurer requested. This request was made in order to ascertain whether the policyholders could reasonably have acquired certain property in the years after the policyholders filed for bankruptcy. Applying a standard cooperation clause that required the policyholders to “provide [the insurer] with documents [it] requests,” the Ohio Court of Appeals held that the insurer had no obligation to pay the claim until the policyholders had satisfied the condition precedent of providing the tax returns. Accordingly, the court affirmed the decision to grant summary judgment in the defendant insurer’s favor. City of Hollister v. Monterey Ins. Co., 165 Cal. App. 4th 455, 81 Cal. Rptr. 3d 72 (6th Dist. 2008)—In this case, a California appellate court affirmed a trial court’s decision granting a declaratory judgment that a property insurer was estopped from relying upon a coverage provision requiring the policyholder to enter into a contract for the repair or replacement of the insured building within 180 days in order to receive coverage for the full replacement cost of the building. The court held that the trial court correctly based such a decision upon the determination that the insurer had improperly delayed its investigation and threatened to deny coverage, thereby rendering it “practically impossible, or at least unreasonably difficult,” for the policyholder to enter into a repair contract during the required period of time, given the risk that the policyholder
could be liable for repairs that were not covered by the insurer. Hollister, 81 Cal. Rptr. 3d at 108. Sher v. Lafayette Ins. Co., 988 So. 2d 186 (La. 2008)—In this matter arising from the extensive flooding in New Orleans following Hurricane Katrina, the Louisiana Supreme Court addressed whether a standard flood exclusion in a commercial property insurance policy could be deemed ambiguous and, therefore, construed in favor of the policyholder. In finding that the flood exclusion was ambiguous, an intermediate court held that the policy language failed to clarify whether the exclusion applied only to natural disasters or to both natural disasters and man-made events. In rejecting this conclusion,
the Louisiana Supreme Court observed that “[t]he plain, ordinary and generally prevailing meaning of the word ‘flood’ is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.” Sher, 988 So. 2d at 194. The court further noted that “this definition does not change or depend on whether the event is a natural disaster or a man-made one.” Id. In addition, the court observed that an interpretation of the flood exclusion to apply only to natural occurrences would be “per se unreasonable,” as “there is no indication within the four corners of the insurance contract that the parties intended to use such a restrictive definition of the word ‘flood,’ and because such a definition is not the plain, ordinary and generally prevailing meaning
of the word.” Sher, 988 So. 2d at 195. Accordingly, while affirming much of the trial court’s judgment in the policyholder’s favor for breach of contract and bad faith claims handling, the court amended the judgment to eliminate damages for losses attributable to flooding. cA
Robert T. Horst is a founding partner of Nelson Levine de Luca & Horst, LLC. Mark H. Rosenberg is an associate attorney with Nelson Levine de Luca & Horst, LLC. John J. McHale is a senior supervisor of the Investigative Services Section of Erie Insurance.
CLAIMS ADVISOR | SUMMER 2009
Would You 34
Quick Look C
Big fish stories dominate the claims fraud headlines, but most claims are legit.
Unfortunately, the honesty barometer is reading “low” for younger policyholders.
Can adjusters keep from becoming cynical and impugning good-client claims?
It’s time for adjusters to get smart on the actual prevalence of fraudulent claims. By Elise M. Farnham, CPCU, ARM, AIM, CPIW
Put two adjusters together in a room, and it won’t take long before they are swapping anecdotes about claims they have handled. Some stories are spectacular, some are poignant, some are funny, and all are noteworthy for some unusual aspect of the loss, damages, or persons involved. Give them a few more minutes, and they’ll be playing the “one-upmanship” game of insurance fraud—each adjuster trying to outdo the other with tales of deceit, misrepresentation, greed, and overstated values. Overhearing the conversation, a casual
CLAIMS ADVISOR | SUMMER 2009
passerby might think that most claims are exaggerated or outright fraudulent and that most claimants are out to get all they can get. I call it the “House-effect,” named after the irascible Hugh Laurie character, Gregory House, M.D., who states again and again with each new case history, “Everybody lies.” But do they? You might be surprised! Fraudulent claims involve some form of lying at some point in time, yet it would appear that the House-effect can only be applied to a minority of the claimants alleging loss and damage.
neither reflects a majority The Insurance Information Institute estimates that 10% of losses. So why do adjustof losses are fraudulent, or about $30 billion per ers focus on fraud as a year. The Coalition Against commonplace occurrence Insurance Fraud estimates about which they must be the losses much higher, constantly vigilant? Every in the $80 billion range. adjuster knows the list of The problem with these “red flags” that would indiestimates is that no one cate the possibility of fraud. really knows for certain Every adjuster carefully how much insurance fraud reviews the facts of each is committed case to ensure in the United There’s no there has been States. With no fraudulent question losses hoverbehavior. But ing at the that society’s are these suspi$300 billion cions supported opposition range, each by evidence of estimate is sig- to fraud is widespread imnificant, but behavior, deteriorating. proper or do the fraudulent cases just stick out in our minds? Take the “Fraud: Fact and Fiction” test to determine if your beliefs about fraud and society’s willingness to rein in fraudulent activity stack up against the statistical data we have available. You may be surprised! There is no question that society’s opposition to fraud is deteriorating. A study by the Association of British Insurers found that more than 70% of individuals over 65 years old would never commit insurance fraud, compared with only 40% of individuals stating the same thing in the 15-to-24 age group. This does not bode well for the insurance industry. Making matters worse, in the same study, 5% of the people polled said that nothing would put them off from committing insurance fraud if they had a claim. The Skeptic Turns Septic So why does it matter if
claims professionals become a little jaundiced over time? The answer may be a question…of trust. When trust is betrayed, it can be a professional and personal affront to the claims representative. Once an adjuster has had an experience where trust in an insured or claimant has been undermined (or obliterated), restoring good will for the next claim can be difficult. Claims representatives may ultimately become unable to feel empathy toward the injured or damaged parties, impairing their ability to establish a relationship that could result in quick resolution and fair outcomes. The mistreatment of policyholders by jaded claims professionals has, indeed, tainted the industry and led to bad faith lawsuits and fist-pounding sermons from legislators on a crusade to find unfairly denied claims. The insurance industry is already near rock-bottom in the public’s eye—witness the media hype and legal onslaught over unpaid claims after Hurricanes Katrina and Rita. Adjusters largely must rely on the basic honesty of their claimants. It is virtually impossible to prove absolutely everything about a claim. The value of the items lost is often not known, receipts are lost, wear and tear occurs naturally, the property is damaged beyond recognition, and the claimant often forgets what is owned. These are all natural occurrences. Who among us could do a complete inventory of our household goods today without physically viewing the items? Often, there may
be nothing left but the word of the insured or claimant. So listen to the stories, and in time youâ€™ll have plenty of your own. Playing the one-upmanship game is fun and entertaining. Just keep in mind that most claimants and insureds are truthful and willing to work with you in a professional manner to submit an authentic and cA valid claim.
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Elise M. Farnham, CPCU, ARM, AIM, CPIW, is an international speaker, industry consultant and president of Illumine Consulting. She can be reached at (770) 367-3148 or at email@example.com.
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Insurance Fraud: Fact and Fiction Test your knowledge of insurance fraud. 1. What was the Insurance Research Councilâ€™s estimated percentage increase in fraudulent auto business insurance claims from 2002 to 2007? 2. What was its estimated percentage increase in fraudulent claims for personal injury protection? 3. According to a 2007 study by the Coalition Against Insurance Fraud, how many states still do not have a fraud bureau? 4. How much money in restitution was ordered according to the 2007 annual study of state fraud bureaus by the Coalition Against Insurance Fraud (CAIF)? 5. In the same study, CAIF learned that the combined budgets for all state fraud bureaus totaled what amount? 6. According to the Insurance Information Institute (I.I.I.), how many states have defined â€œinsurance fraudâ€? in their statutes? 7. According to I.I.I., how many states require mandatory insurer fraud plans in which companies formulate a program for fighting fraud and sometimes establish special investigation units to identify fraud patterns? 8. According to I.I.I., how many states limit the protection offered by immunity statutes? 9. The earliest case of recorded life insurance fraud occurred when? 10. According to a study by Progressive Insurance Company in 2001, what percentage of Americans would commit insurance fraud if they thought they could get away with it? ANSWERS: 1. 2% increase. IRC estimates the rate increased from 9% in 2002 to 11% in 2007. 2. 1% increase. IRC estimates the rate increased from 5% in 2002 to 6% in 2007. 3. 9: Alabama, Illinois, Indiana, Maine, Michigan, Oregon, Vermont, Wisconsin and Wyoming. 4. $179,036,100 5. $147,738,214 6. 50 states plus the District of Columbia 7. 19 states plus the District of Columbia 8. 5: Alabama, Massachusetts and Wyomingâ€”arson only; Rhode Islandâ€”WC, arson, and auto only; Hawaiiâ€”auto only 9. 1730s in England, in a case of pretended death, in which a father and daughter staged a succession of scenes in which the daughter appeared to convulse with heart spasms then go limp in apparent death, while the father stood by distraught. 10. 10%
CLAIMS ADVISOR | SUMMER 2009
Intellectual Property, Fraud and Social Networking:
A Perfe Liabili Storm 38
Quick Look C
Misrepresentation and fraud on Web sites can lead to claims on identity and intellectual property.
Laws will change as behaviors and claims change.
Experts will likely be needed to establish the value of loss and appropriate compensation.
d By Jonathan Faber
Distinguished legal scholar Roscoe Pound once said, â€œThe law must be stable, but it must not stand still.â€? By design or necessity, the law usually can only be reactive to new developments in commerce and technology. Recent social networking sites like MySpace, Facebook, and Twitter, and sites populated by user-driven content like YouTube and Zazzle, have accelerated those developments with which the law must keep pace. In early June, misuse of Twitter was the subject of a public statement by the Indianapolis Colts and, separately, a
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CLAIMS ADVISOR | SUMMER 2009
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