Detecting and Preventing Insurance Fraud: State of the Nation in Review

• Publication year: 2022

52 Creighton L. Rev. 293. DETECTING AND PREVENTING INSURANCE FRAUD: STATE OF THE NATION IN REVIEW

DETECTING AND PREVENTING INSURANCE FRAUD: STATE OF THE NATION IN REVIEW

Johnny Parker ^[*]

I. INTRODUCTION

The business of insurance involves many transactions that have the potential for abuse and illegal activities. Consequently, insurance fraud can take many forms and affect multiple industries. It can and often does involve the conduct of individuals who are not parties to an insurance contract. It can also involve an insurance company, insurance agent, or an independent claims adjuster. An act of fraud can be against consumers or by consumers against an insurance company.

A fraudulent insurance transaction can be described as any situation where a person knowingly and with the intent to injure, defraud, or deceive: (1) presents or causes to be presented to or by an insurer, self-insurer, self-insurance fund, servicing corporation, purported insurer, broker, or any agent thereof, any written or oral statement as part of, or in support of, a claim for payment or other benefit pursuant to an insurance policy or a health organization subscriber or provider contract, knowing that such statement contains any false, incomplete or misleading information concerning any fact or thing material to such claim; (2) prepares or makes any written or oral statement that is intended to be presented to or by any insurer, self-insurer, self-insurance fund, servicing corporation, purported insurer, broker, or any agent thereof, in connection with, or in support of, any claim for payment or other benefit to an insurance policy or a health organization subscriber or provider contract, knowing that such statement contains any false, incomplete or misleading information concerning any fact or thing material to such claim; or (3) engages in any statutorily prohibited insurance related activity or conduct. ^[1] In layman's terms, insurance fraud can be described as any act committed with the intent toobtain a fraudulent outcome from an insurance process. This may occur when a claimant attempts to obtain some benefit or advantage to which he or she is not otherwise entitled, or when an insurer knowingly denies some benefit that is due. Insurance fraud can be committed by any party directly or indirectly involved in an insurance-related transaction, including: applicants for insurance, policyholders, third-party claimants, insurance agents, insurance companies, and professionals who provide services and equipment to claimants.

The precise cost of insurance fraud is almost impossible to quantify. ^[2] Nevertheless, many experts estimate that the total cost of insurance fraud in the United States exceeds $100 billion per year. ^[3] According to the Federal Bureau of Investigation's website, insurance fraud-excluding health insurance-costs the average U.S. family between $400 and $700 per year in increased premiums. ^[4] When health insurance fraud is included in the calculation, the annual estimated cost per family rises to $1,400 per year. ^[5]

The economic impact of insurance fraud is clear. It worsens public services, undermines the financial stability and profitability of companies, and diminishes the amount of disposable income for everyone except the fraudster. As described by the general assembly of Colorado:

[I]nsurance fraud is expensive . . . it increases premiums and places businesses at risk; and . . . reduces consumers' ability to raise their standards of living and decreases the economic vitality of this state . . . . [T]he state of Colorado must aggressively confront the problem of insurance fraud by facilitating the detection of and reducing the occurrence of fraud through stricter enforcement and deterrence and by encouraging greater cooperation among consumers, the insurance industry, and the state in coordinating efforts to combat insurance fraud. ^[6]

No line of insurance is free of insurance fraud. ^[7] Neither is insurance fraud a victimless crime. It is a "low-risk, high-return criminal activity, second only to tax evasion in economic crime." ^[8]

The purpose of this Article is to review existing regulatory requirements and provide a document to guide insurance regulators in the development of insurance fraud regulations. This Article performs that purpose by engaging in a comprehensive examination of anti-fraud laws of general application. Consequently, anti-fraud laws applicable exclusively to a specific type of coverage, such as workers' compensation insurance, viatical settlement contracts, health insurance, life insurance, or automobile insurance, are beyond the scope of this Article. By examining anti-fraud laws of general applicability, this Article attempts to provide a platform for encouraging standardization, which would narrow the range of disagreement between jurisdictions in the context of anti-fraud laws. It also ensures greater predictability, certainty, and uniformity in the interpretation and application of laws.

Section II examines the law of states that have legislatively declared insurance fraud to be a crime. This section details the nature of the conduct that establishes beyond a doubt that everyone, including consumers, licensed professionals such as attorneys and physicians, insureds, and insurers, will be held accountable for their conduct. Section II also surveys mandatory fraud warning statutes. It identifies important similarities as well as significant differences between the respective statutes.

Section II also discusses state insurance fraud laws that utilize monetary rewards and qui tam provisions as instruments for detecting and deterring insurance fraud. Interestingly, as explained in Section II, monetary reward programs are only offered in a handful of states. Section II concludes with a detailed examination of the laws of the two states which have incorporated qui tam provisions into their anti-fraud laws.

Section III examines the law in jurisdictions that use fraud bureaus as a means for detecting and preventing insurance fraud. Section III explores the powers, duties, and responsibilities of fraud bureaus. This section also explains how the department in which the bureau is located affects its ability to directly prosecute criminal insurance fraud cases.

Section IV evaluates the use of mandatory fraud reporting statutes as a means of combating insurance fraud. As detailed therein, all mandatory fraud reporting statutes are based on one of four models. As explained in Section IV, each model differs with regards to its use of one or a combination of three relevant criteria.

Section IV also discusses state statutes that provide immunity from civil liability for reporting suspected insurance fraud. The statutes by and large provide only qualified immunity, which is subject to forfeiture if not exercised in a proper manner. Section IV examines the causes of a forfeiture of immunity based on the characterization of the misconduct.

Section V explores state laws that require insurance companies to create, implement, and maintain anti-fraud initiatives and anti-fraud plans. Anti-fraud initiatives provide insurance companies the opportunity to be creative in addressing the problem of insurance fraud. However, anti-fraud plans must also comply with specific statutory mandates. Section V examines these requirements.

Section VI concludes by identifying the theme common to all statutory laws aimed at detecting and preventing insurance fraud. That common theme is cooperation. Each statutory provision-to varying degrees-is designed to encourage and motivate relevant stakeholders to cooperate in a uniform and unified manner toward a single goal- eradicating insurance fraud. Section V concludes that the degree to which a law achieves this goal-cooperation-corresponds to its overall effectiveness in achieving the desired outcome.

II. CRIMINALIZING INSURANCE FRAUD

In order to more aggressively confront the problem of insurance fraud, state governments have declared that insurance fraud constitutes a crime subject to substantial criminal penalties. Forty-seven states and the District of Columbia ^[9] legislatively recognize that a fraudulent insurance act constitutes a specific crime. ^[10] In the vast majority of jurisdictions insurance fraud constitutes either a felony or misdemeanor, depending on the dollar value of the fraudulent transaction. ^[11] In other jurisdictions, insurance fraud is recognized exclusively as a felony. ^[12] Insurance fraud laws often subject insurance professionals, institutions, and individuals who engage in insurance fraud to civil penalties, ^[13] including: fines, forfeiture of license, ^[14] and employment disqualifications. ^[15]

Fraud is universally considered a crime involving moral turpitude. ^[16] Consequently, licensed practitioners, including lawyers and health care professionals, pursuant to their respective codes of professional conduct, are implicitly subject to sanctions for engaging in insurance fraud. ^[17] Nevertheless, a number of jurisdictions have sought to ensure public trust and the integrity of licensed practitioners who, by virtue of their profession, are involved in insurance transactions through providing remedial provisions governing licensure and suspension tailored to the crime of insurance fraud. Thus, some insurance fraud laws mandate that when a practitioner is convicted...