Academic journal article Risk Management and Insurance Review

Prosecuting Insurance Fraud-A Case Study of the Massachusetts Experience in the 1990s

Academic journal article Risk Management and Insurance Review

Prosecuting Insurance Fraud-A Case Study of the Massachusetts Experience in the 1990s

Article excerpt

ABSTRACT

There is widespread agreement that insurance fraud is a major problem in the United States. There is little agreement, however, in what constitutes insurance fraud in the many articles and research papers published on the subject during the past ten years. The term "fraud" carries the connotation that the activity is illegal and, hence, that prosecution and conviction are potential outcomes of a specific fraud. Accepting that premise allows us to adopt the legal definition of fraud in the insurance context and to examine the experience of dealing with insurance fraud in terms of property-liability insurance lines. Specifically, we examine ten years of data on referrals and disposals of incidents of suspected fraud as processed by the Insurance Fraud Bureau of Massachusetts to provide estimates of the distribution of types of people who perpetrate a variety of insurance frauds. We compile conviction rates, sentencing outcomes, and recidivism rates in detail to illuminate the law enforcement process and to gauge the deterrent effect of prosecuting insurance fraud in the criminal courts. The Massachusetts data lead us to conclude that the number of cases of convictable fraud is much smaller than the prevailing view of the extent of fraud; that the majority of guilty subjects have prior (noninsurance) criminal records; and that sentencing of subjects guilty of insurance fraud appears effective as both a general and specific deterrent for insurance fraud but ineffective as a specific deterrent for other crime types, as the recidivism rate appears no different from the general property criminal's recidivism rate.

INTRODUCTION

There is widespread agreement that insurance fraud is a major problem in the United States. More than 27 percent of insurers responding to a recent industry survey believe that the extent of fraud in the private passenger and workers' compensation insurance lines is high (IRC/ISO, 2001). There is little agreement, however, as to what constitutes insurance fraud in the many articles and research papers published on the subject during the past ten years.1 This ambiguity in defining insurance fraud results in widely divergent estimates of the proportions of claims and claim dollars or policy premiums attributable to fraud.

In their annual report for 2000, the Coalition Against Insurance Fraud (CAIF, 2001) includes a telltale section called "Pin the Tail on the Estimate." Estimates of the cost of insurance fraud range from a low of $18 billion by the National Insurance Crime Bureau for property-liability fraud to a high of $96 billion by Conning & Co. for all lines of private market insurance. Overall, CAIF estimates that "insurance fraud costs Americans at least $80 billion a year, or nearly $950 for each family."2 Considering that annual national premiums for property-liability insurance and life insurance in 2000 were $300 billion and $435 billion,3 respectively, for a combined $735 billion, 6 to 13 percent of each insurance premium dollar goes to pay for fraud. If the typical property-liability fraud represented a claim for about $20,000,4 about one and one half-million fraudulent insurance claims would be filed per year. However, in Massachusetts, which accounts for about 6 percent of the U.S. population, the Insurance Fraud Bureau (IFB) only receives about 1,500 property-liability fraud referrals per year-one-sixtieth of what might be expected.

The vast discrepancies outlined above are representative of the wide range of meanings that the word "fraud" has in different contexts rather than of vast amounts of undiscovered fraud that should be prosecuted. Often, the adjectives "soft" and "hard" will precede "fraud" to convey a distinction between claims involving exaggeration of damages from real accidents and those claims arising from staged, nonexistent, or unrelated accidents. While the latter, if proven beyond a reasonable doubt in a court of law, is most certainly a criminal matter, the former may simply be a matter of difference of judgment more suited to civil adjudication or proscription by law or regulation than criminal prosecution. …

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