The insurance industry has known for many years that as the recession has deepened, fraudulent claims have dramatically escalated and cost insurers millions of pounds each year. It is only now that they are beginning to fight this problem head-on.
The insurance contract is unique in so far as it is one of "utmost good faith", which is expected of both the insurer and the insured. All other consumer and business contracts are generally governed by the principle of "let the buyer beware".
Policyholders' familiarity with the purposes, values and conditions of insurance cover can no longer be taken for granted. Today a far greater percentage of the population seek insurance protection for their houses, cars and personal effects. It is commonplace to seek insurance cover for health, life and family holidays. Today, making a claim on an insurance policy is more likely to be routine due to the diversity of cover available. It is no longer restricted to exceptional business and personal catastrophes.
However, the availability of cover to our community is being threatened by fraud.
Sadly, insurance fraud is still seen by the general public as acceptable. It does not attract the same outrage as other theft offences such as burglary or robbery. In a recently commissioned report for the US insurance industry, it was claimed that if insurance fraud were a business, it would rank among the Fortune 500 companies. That same report revealed that 20 per cent of those questioned believed it right to inflate an insurance claim to make up for past premiums paid where no claims had been submitted.
Insurance fraud is big business. Not only does the industry have to cope with otherwise honest citizens making fraudulent claims, but also the criminal elements of our society have become aware that they no longer need to turn to armed robbery to net large sums of money. If they hold-up a bank, they risk the prospect of life imprisonment if things go wrong. If they submit a dodgy insurance claim, it is either unlikely to be spotted or reported. If there is punishment, it is either a slapped wrist or, at worst, a light prison sentence.
Some insurers have until recently been guilty of burying their corporate heads in the ground. They refused to recognise publicly that fraud was a problem. The solution, as they saw it, was to pay the claim and simply refuse to provide further cover when the policy came up for renewal. However, the industry constantly raised premiums to cover the cost of paying fraudulent claims and justified doing so by claiming that it would cost their policy holders more if they were to implement effective fraud control and claims verification systems. In addition, they were ever fearful of damaging adverse publicity should they lose a claim brought by a policyholder in the civil courts.
However, the nineties have seen a turn around in the insurers' attitudes. Fraud has been recognised as costing the industry too much and can no longer be ignored or swept under the boardroom carpet.
The industry's professional body, the Association of British Insurers (ABI), has produced a blitz on fraud. It launched a o250,000 advertising campaign to increase public awareness that insurance fraud was a crime. It also set up, in 1992, in conjunction with the Home Office, the Arson Prevention Bureau to spearhead a national programme against arson and in particular fraudulent arson.
Yet the fight to defeat fraud is a continuous one. The key is education. The industry must educate its members to be vigilant and scrutinize claims for tell-tale signs of fraud; it must educate the public that insurance fraud is a serious crime and it must educate Parliament, the police and the judiciary.
The industry cannot tackle this massive social problem on its own. It needs the support of Parliament to remove the anachronistic right to silence in civil proceedings which can give the fraudster an unjust opportunity to stultify civil proceedings. A fraudster may be allowed to refuse to answer questions or release documents in civil proceedings if he can show that by answering such questions or releasing the documents he would expose himself to a criminal prosecution for an offence arising under UK law.
The police must be made to appreciate the extent of the fraud epidemic and realise that they cannot leave fraud solely to their so-called "specialist" colleagues. It is their responsibility to investigate and prosecute fraudsters where cases are referred to them by insurance companies. The criminal and civil judiciary must appreciate just how prevalent fraud is. Judges must be prepared to pass heavy sentences on convicted offenders. The civil judiciary, when trying a case where an insurer alleges fraud, must no longer view the allegation as distasteful and automatically be prejudiced against the defending insurance company for raising such an allegation in the civil courts.
Without the help of all these bodies, insurers may be left as a "voice crying in the wilderness" in their battle to combat fraud. Insurers' success in this battle is vital to our business and social communities.
Top 10 pre-claim fraud indicators
1 Frequent change of insurer. 2 Uncharacteristic increases in the levels and nature of the insurance cover. 3 Unclear ownership position of the insured. 4 Substantial investment necessary to comply with official regulations or to fulfil insurer's requirements. 5 Loss of a major customer. 6 Requests for insurance of risks not previously covered. 7 The incident occurred during a weekend or public holiday. 8 The incident has resulted in an alleged loss of all written records. 9 The incident occurred shortly after the commencement of the policy or shortly before its expiry. 10 The insured's business is categorised as "high risk".Top 10 post-claim fraud indicators
The Insured:
1 Puts forward a too complicated or too vague alibi. 2 Insists on an unusually high level of confidentiality in respect of all matters. 3 Declines to co-operate or employs obvious prevarication tactics when requests for information are made. 4 Attempts to exert pressure to settle the claim quickly by threatening references to senior management, the media, the Ombudsman or action through the courts. 5 Demonstrates a high degree of indifference or an unusually high level of knowledge of insurance practice and procedure. 6 Is eager to compromise the claim without good reason or subject to the need for further evidence being dispensed with. 7 Refuses to make signed statements and prefers to deal with all matters over the telephone. 8 Has made inconsistent statements to those attending the incident and later when enquiries are furthered. 9 Is unable to produce satisfactory documentary evidence to support the quantum of the claim or procedures an excessive amount of documentation. 10 Submits bills or receipts from one supplier only or purportedly from several different suppliers but they bear the same handwriting or are undated.Nicholas Sinfield and Nicholas Young
Nicholas Sinfield is a partner and Nicholas Young is a senior lawyer at international insurance law firm Davies Arnold Cooper.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances from Nicholas Sinfield or Nicholas Young (Tel. 071 283 8658).
Copyright Mondaq Ltd 1995 Tel +44 171 820 7733.
