Fraud remains a major issue for insurance companies, since it is discovered frequently in both legitimate and bogus claims. In both types of claims, an insured may attempt to defraud the insurer regarding either the quantity or quality of contents reportedly damaged or lost.
Strategies and tools to help uncover incidents of contents claims fraud include scene investigations, proof-of-loss forms, recorded statements, and examinations under oath. The most critical piece of evidence, however, may be the insured's contents inventory.
To fully leverage this piece of evidence, it is important to have the insured prepare and submit the inventory as soon as possible. If the inventory is submitted early in a fire claim, for example, information gathered by the resolution professional and/or the fire investigator can be utilized in concert with the inventory to confirm whether the items listed were present at the time of the loss.
It is important to remember that the primary goal of a fire investigator may be to determine the origin and cause of the fire. That fire investigator may also be the first to view the scene following fire suppression efforts. With the inventory in mind, it is imperative that the investigator be asked to secure detailed photographs of the debris and overhaul at the fire scene. This task will likely involve additional photographs that, for purposes of origin and cause determination, may not have otherwise been taken. The photographs should be labeled in a way that allows for identification of approximate room location of the debris in the photographs. Keep in mind that while the fire investigator is not a contents inventory expert, she should be able to testify about the photographs she took, how and when they were taken, and the equipment used.
As with any claim, an early submission of the inventory will provide the resolution professional with sufficient time to validate a personal property claim. The insured should sign the inventory form or otherwise validate the items being claimed. In a portion of the recorded interview, the resolution professional should have the insured explain who prepared the inventory, how it was prepared, and confirm the inventory documents that were submitted. Having the insured verify the inventory will avoid any authentication issues should litigation follow any denial of the claim.
It is equally important that the inventory be complete. Policies generally provide that the inventory must contain the quantity, the description, the actual cash value, and the amount of the loss. In addition, policies typically request that bills, receipts, and related documents that support the figures in the inventory be produced. The inventory should also include the ages of the personal property reportedly damaged or destroyed. The age of the item allows the insurance company to determine the actual cash value of each item, which is based on the amount of depreciation that is based on the age of an item and its condition.
The resolution professional or special investigations unit (SIU) investigator involved should review the inventory and documentation submitted prior to the detailed recorded interview. Any items or documents that are deemed questionable or suspect should be emphasized in the interview to help substantiate them. In a large loss, it may be helpful to utilize a diagram of the structure and ask that the subject identify the items claimed and their locations within that diagram. This will allow accurate comparison with the debris field photographs for verification.
The documentation submitted should be reviewed to rule out modification or alteration. This may occur with tax amounts that no longer match inflated/modified prices, or with other alterations in order to create or increase the values claimed. Following up with the claimed source of documentation—the retailer or seller—is also recommended to validate and rule out returned items.
In some cases, it may be useful to make verification calls prior to the interview so that questionable facts can be presented for clarification by the insured. In large losses, it may be prudent to conduct a neighborhood canvass to rule out any movement of property in or out of the insured risk prior to a fire. Many other information sources should be considered and explored to help verify the inventory. This can include, but is not limited to, digital photographs and related metadata, as well as divorce records that can help determine the existence and ownership of some of the property being claimed.
Not only are the ages of items relevant to any actual cash value settlement, but also the ages can assist in assessing whether the insured had the financial means to have purchased and possessed the items reported damaged at the time of the loss. For example, insureds in one fire claim said they had $400,517 worth of personal property that was purchased in the three years leading up to the fire. Their financial records, however, revealed that, based on their income and deducting their living expenses, the insureds only had $179,145 to have purchased the amounts of personal property contents being claimed. Accordingly, the insureds had submitted a fraudulent claim by overstating their personal property damage by at least $221,372.
Various documents can assist in determining what financial resources an insured has to purchase the claimed contents. An insurer should request that the insured produce copies of bank statements, tax returns, W-2s, and credit card statements. In some cases, authorization should be obtained in order to secure a detailed credit report to help support a claim. Another important resource available is any bankruptcy filings by the insured. Bankruptcy petitions provide a wealth of information regarding an insured's representation of the types and values of personal property possessed.
An insured's bankruptcy petition should be reviewed closely to see if the insured omitted from the petition the very item that is the basis for the insurance claim, or misrepresented the value of the item. If so, the insured may be prevented from recovering on the basis of the policy exclusion for fraud and concealment.
In addition, a review of an insured's bankruptcy filings may provide circumstantial evidence that the insured had a financial motive to falsify a claim. It could also call into question whether the insured had the financial means to purchase the allegedly stolen or lost item.
Insureds often undervalue an asset on a bankruptcy petition while inflating the value on an insurance claim. For example, in Fidelity National Ins. Co. v. Jamison-Means, the insured represented in her bankruptcy schedule that the entire value of her household goods approximately 30 days prior to the loss was only $2,300. But in her proof of loss submitted to the insurance company, she claimed that $41,818 of property was stolen. The court held that "as a result of the false information" that the insured provided to its insurance company, the insured violated the concealment or fraud exclusion in her policy.
Any representations by an insured in the bankruptcy petitions also may provide grounds for an insurance company defense based on the doctrine of judicial estoppel should the insured file suit. The doctrine prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding. The United States Supreme Court, in the 2001 case New Hampshire v. Maine, identifies three factors to aid courts in deciding whether to apply the doctrine:
" First, a party's later position must be clearly inconsistent with its earlier position.
" Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled.
" Third, is the party who is seeking to assert an inconsistent position deriving an unfair advantage or imposing an unfair detriment on the opposing party if not estopped?
In a lawsuit between the insured/debtor and the insurance company, a court may apply its equitable discretion to judicially estop an insured from asserting an insurable interest in property where the insured did not disclose his interest in the property before a bankruptcy court, prompting the bankruptcy court to discharge the insured's debts. The rationale is that the insured's failure to reveal assets operates as a denial that such assets exist, and, therefore, deprives the bankruptcy court of the full information it needs to evaluate and rule upon a bankruptcy petition, while also depriving creditors of resources that may satisfy unpaid obligations.
Some insureds are attempting to avoid judicial estoppel by arguing that they used different measures of valuation in the bankruptcy petitions versus the insurance claim. As a result, it is important that the resolution professional ask about how the insured valued the property listed on the bankruptcy petitions and on any contents lists. The resolution professional should also inquire whether the property listed on a contents list was in existence at the time the insured filed for bankruptcy or was purchased after the insured's debts were discharged by the bankruptcy court. The insured's answer will confirm whether the insured is valuing the exact same property and not adding to the insurance claim personal property he purchased after filing for bankruptcy.
Remember that contents fraud is an equal opportunity endeavor and is not committed by just one particular group, race, or gender of insureds. As a result, every claim must be assessed, and the investigation must include a detailed review of the insured's contents inventory and financial documents. In every case, the resolution professional and investigator should assume the claim is valid and approach each claim with the intent of proving that what has been told by the insured is the truth.
Investigate to verify the claimed inventory and the documentation provided by the insured. If there is material misrepresentation or fraud, it will show up in the results and appropriate action can be taken at that point.
Originally published in The CLM Magazine
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.