Technology: the new weapon in the war on insurance fraud.

• Author: Fox, Bruce R.

Not only can technology help identify fraud, but the knowledge of its availability and use will deter potential offenders

BY SOME estimates insurance fraud costs the insurance industry more than $20 billion each year. Insurance companies and their defense counsel have for years attempted to stem the tide of insurance fraud despite the general public view that insurance fraud is a victimless crime. Law enforcement officials traditionally have put insurance fraud on the back burner, believing that there are other crimes more worthy of their scarce resources.(1)

Insurance fraud investigations are difficult because the suspects go to great lengths to keep their activities secret. The investigations tend to be time consuming and expensive. If they are not fruitful, they may open the insurer to allegations of bad faith in claims handling. As a result, insurance companies and defense counsel tend to approach fraud investigations with some trepidation.

Extra care must be given by the investigator to keep investigative expenses in check and to ensure that the investigation is reasonable to protect the insurer from additional liability. This is especially true when defense counsel is handling a lawsuit in which the insurer suspects fraud, because defense counsel's involvement in the fraud investigation will increase the expense associated with the investigation. Defense counsel, as an agent of the insurer, may unintentionally contribute to a bad faith action against the insurer by the claimant.

Insurance companies and defense counsel always are looking for ways to make fraud investigations more efficient, accurate and effective. Computer technology, if properly understood and utilized, can assist in fraud investigation efforts.

INSURANCE FRAUD

The legal elements of insurance fraud, from common law definitions to the effect of insurance policy language, vary from jurisdiction to jurisdiction. In general, most common law and statutory definitions of insurance fraud require proof of some intentional misrepresentation by the insured/claimant that is material to the insurer's issuance of the policy or investigation of a claim.(2) A misrepresentation is simply an incorrect statement of fact regarding an element of the claim, such as the description of how an incident occurred, the nature and extent of any alleged damages or injuries flowing from that incident, and the existence of any prior claims, accidents or injuries. An intentional misrepresentation is a deliberate misstatement, not the result of ignorance, mistake or negligence.(3)

In Middlesex Mutual Assurance Co. v. Walsh,(4) the plaintiff-insured received a $275,000 uninsured motorist claim arbitration award as a result of the death of his son, who was struck by a stolen motor vehicle. The insurer appealed, claiming that the insured made a material misrepresentation in his insurance application by failing to disclose that the decedent lived in his household and that the decedent had previously had his driver's licensed suspended. The Connecticut Supreme Court determined that the insured's statements were not misrepresentations because the application question regarding residence asked the insured to "List all children in the household" (emphasis added). As the decedent was an emancipated adult, the court held that the insured was justified in not identifying the decedent as a household member.

The second application question asked whether the license of any operator in the insured's household had been revoked or suspended. The insured responded "No," when in fact the decedent's license had been previously suspended. The court concluded that this was not a misrepresentation as the insured had no knowledge that his son, who had a mental defect, even had a driver's license, let alone that it had ever been suspended.

As Walsh demonstrates, it is very difficult to establish intent to commit fraud. As a result, many courts allow intent to be proved through circumstantial evidence?

What constitutes a material misrepresentation will depend on whether the alleged fraud relates to the policy application or a claim. In the application process a fact is material if it might have influenced a reasonable insurer in deciding whether or not to accept the risk. In CenTrust Mortgage Co. v. PMI Mortgage Insurance,(6) CenTrust, a mortgage company, as part of the sale of multiple condominium units obtained mortgage insurance from PMI but failed to disclose certain unusual features of the loans that in effect resulted in a loan-to-value ratio greater than 100 percent. Thus, PMI's risk was increased.

The Arizona Supreme Court found that PMI was entitled to rescind the mortgage insurance because of CenTrust's material misrepresentations regarding the loan-to-value ratio and its omissions regarding the specific features of the unusual loan arrangement.

A representation is material to an insurance claim if the subject matter is relevant and germane to the insurer's investigation of the claim. In Fine v. Bellefonte Underwriters Insurance Co.,(7) the insured sustained fire damage to the insured property. The sprinkler system did not operate at the time of the fire because the pipes were frozen. The insured made a false statement that the nighttime temperature setting was 40 degrees, when in fact it was 30. The insurer used this false statement to deny the claim, but the insured countered that the false statement was irrelevant since the sprinkler system would have frozen even if the temperature had been set at 40. The Second Circuit decided that whether the false statement ultimately turns out to be decisive is irrelevant to the insurer's defense. It is enough to satisfy the materiality requirement if the false statement discourages, misleads or deflects the insurer's investigation.

Puffing or a subjective exaggeration of a claim is usually not considered insurance fraud...