Legal update: Courts broadly view fraud laws to bolster crime fighting


By Matthew J. Smith, Esq.

Fraud fighters are convincing courts view insurance fraud as a serious crime when making rulings. Several courts thus broadly applied state and federal laws to combat this epidemic in recent months.

Whether involving auto claims, medical fraud or other violations, recent state and federal cases are strengthening — though in some cases limiting — the fraud fight.

Luis v. United States, 136 S.Ct. 1083 (2016)

Issue: May the federal government freeze assets not connected to a suspected fraud or crime?

Petitioner Luis was charged with Medicare fraud under federal and state laws. The federal government froze his assets as “fruits of the poisoned tree” arising from his alleged fraud. Luis objected to the seizures. He claimed the government denied him his Sixth Amendment right to representation by legal counsel because he could not use his financial assets to hire an attorney.

Even if the government convicted Luis, his legitimate assets and income from non-criminal activities were wrongfully seized, he contended. That seizure also denied him his constitutional right to use untainted assets to hire legal counsel.

Decision: Restraining his “legitimate,” untainted assets needed to retain counsel violates his Sixth Amendment rights. A court majority believes the right to legal counsel of one’s choice supersedes the government’s right to seize assets. This is true, even if it appears before conviction that most of his assets were gained fraudulently.

The court rationalized it should be possible to review financial records and determine which assets are “clean,” and which stem from potential fraud.

Importance: Any decision by the U.S. Supreme Court has wide impact on lower federal courts, and state courts reviewing similar issues. All Americans should be concerned about overreaching governmental authority and improper seizing of assets. This decision makes it harder for government agencies and law enforcement to identify “legitimate” versus fraudulently obtained assets.

The question is whether federal and state courts will apply this decision beyond Medicare fraud. Other federal and state statutes often allow seizing assets if a prima facie fraud case is established. This prevents suspects from liquidating assets before a criminal conviction.

This decision clearly places the responsibility on the government agency to properly determine untainted versus fraudulently obtained assets before seizing.

Husky Int’l Electronics, Inc. v. Ritz, 136 S.Ct. 1581 (2016)

Issue: The U.S. Supreme Court was asked to define “actual fraud” in interpreting what constitutes a fraudulent conveyance. The court addressed whether a debtor’s misrepresentation is required to establish “actual fraud.”

Husky International provided expensive electronic equipment to a company owned in part and controlled by defendant Ritz. The components were delivered to the buyer, but never paid for. Husky tried to collect. Ritz placed the company into bankruptcy to avoid paying.

Husky claimed the bankruptcy process was a fraudulent attempt to escape paying. Even if the bankruptcy was valid, Ritz committed “actual fraud” and should remain personally liable for paying for the electronic equipment even his then-corporation made the purchase.

Decision: The Supreme Court ruled for Husky. Even if the bankruptcy was valid, it was possible to “pierce the corporate veil” and seek recovery for the unpaid invoices directly from Ritz. The court agreed Ritz filed for bankruptcy solely to avoid paying for legitimate expenses. The term “actual fraud” encompasses fraudulent-conveyance schemes, even if they do not involve a false representation.

Even though the bankruptcy filings were not false on their face, the bankruptcy’s intent met the definition of “actual fraud.” Husky is entitled to collect the debt directly from Ritz even if the corporation was insolvent.

Importance: This is one of the most far-reaching decisions affecting insurance fraud to come from the U.S. Supreme Court in years. The court took an expansive definition of “actual fraud.” The term may be used for all federal laws and statutes, and potentially state levels.

In sweeping language, the court said “actual fraud” includes a wide variety of interpretations, actions and schemes. The defendant must intend to commit fraud and gain an unfair advantage or financial gain.

Importantly, the Supreme Court adopted a broad view of “actual fraud.” This agrees with the Coalition’s legal positions. The Coalition urges federal and state courts to broadly construe laws and statutes addressing fraud. The courts should provide wide latitude in applying those laws against fraudsters.

Allstate v. Rehab Alliance of Texas (Supreme Court of Texas)

Issue: Allowing medical providers to hide false claims amid treatment for crash injuries will encourage scams and could discourage insurers from writing business in Texas, the Coalition contends in an amicus brief.

Allstate alleges Houston-based Rehab Alliance recruited legitimate crash victims for false injury treatment. The clinic upcoded treatment, billed doctor rates for work by nurses, and performed unneeded treatment such as MRIs, the insurer asserts. Patients also were secretly told they weren’t financially liable for uninsured treatment, Allstate says.

The clinic camouflaged false treatment claims involving legitimate crash injuries. Unlike staged wrecks with fake injuries, this sophisticated disguise makes it daunting to clearly separate bogus from necessary treatment claims.

The insurer paid 107 claims and sued to recover after discovering evidence of fraud. A lower court granted Rehab Alliance summary judgement. Allstate appealed to the Texas Supreme Court.

Decision: Pending.

Importance: Insurers need access to civil courts and the ability to sue fraudsters. Allowing camouflaged injury claims burdens insurers with higher costs that raise premiums. Medical care and the ability of insurers to promptly settle claims will suffer as well.

Patel v. Allstate New Jersey Ins. Co. (3rd Cir. 2016)

Issue: Does plaintiff have standing to allege the New Jersey Attorney General and the state Office of the Insurance Fraud Prosecutor improperly outsourced criminal investigations to insurer Special Investigation Units? 

Insurer SIUs assist the state Attorney General and insurance department in investigating insurance fraud. This joint effort combines public- and private- sector resources. Insurers often have more resources to assist the state in combating fraud.

Decision: In a limited decision, the court ruled Dr. Patel has no legal standing to bring the case. The court did not directly address whether mixing public- and private-sector investigations is proper in New Jersey.

Patel could not prove he sustained any injury because the state never prosecuted him for insurance fraud. Patel argued the mere combining of a government function with a private insurance company violated his constitutional rights. The court didn’t address this issue, or determine if these joint efforts were proper even if criminal charges were filed.

Importance: It is regrettable the court did not address the key issue. New Jersey is a model of public-private partnership in investigation and prosecuting insurance fraud.

The court gave no clear direction whether such joint efforts pass constitutional muster in New Jersey. The Coalition supports joint anti-fraud efforts at all levels — within governmental agencies, and between governmental agencies and private entities.

Iowa v. Rimmer, 2016 WL 1165751 (2016)

Issue: May persons from Wisconsin and Illinois be charged in Iowa for running a staged-crash ring without even entering the state of Iowa?

The defendants staged vehicle crashes involving bogus injury treatments. The scheme took place in Chicago. The fraudsters didn’t know the insurer’s claims office in Davenport, Iowa handled those claims.

Criminal charges were filed in Iowa after communications between the Iowa claims office and local prosecutor. The defendants moved to dismiss. They said they were not subject to Iowa jurisdiction. The crashes happened in Illinois, they did not reside in Iowa, and did not commit fraud in that state.

Decision: In a broad decision, the Iowa Supreme Court said “persons engaged in multi-state insurance fraud assume the risk of prosecution wherever victims are located. A contrary holding impedes the ability to prosecute and deter multi-state insurance fraud schemes…”

The court addressed the rise of the internet and multi-state (and even multi-national) communications as an increasing part of society.

Where the defendants live was not material. Nor was the location of the underlying accidents, if the scheme was connected to Iowa in any way. The claims were adjusted in Iowa. A sufficient nexus thus existed between Iowa and the fraudsters to  sustain criminal charges in Iowa.

Importance: This is the type of broad, far-reaching decision the Coalition urges state and federal courts to take. With the internet’s rise, fraud no longer is limited to a geographic area or region. Decisions such as this allow prosecuting fraud on a much wider spectrum than before — in keeping with changing technology.

The Coalition long has urged courts to take a longrange view of insurance fraud as it as it changes with new technology. This view best ensures laws are updated and courts apply the law in alignment with evolving society.

New Jersey v. Goodwin, 224 N.J. 102 (N.J. 2016)

Issue: What constitutes a false statement, and does acquittal in a criminal action bar a subsequent insurance-fraud action?

Facts: The insured owned an SUV her boyfriend burned so she could falsely collect insurance money. Criminal charges were brought against the boyfriend in a separate case. He was acquitted. The boyfriend next was charged with insurance fraud. He allegedly assisted his girlfriend in making the false claim with her insurer.

The boyfriend argued the insurer did not rely on his statements, even if they were false. That he was acquitted on the criminal charges barred  subsequent prosecution under the state’s insurance-fraud statute, he contended.

Decision: The New Jersey court recognized that the insurer knew from the start the boyfriend lied. The insurer never relied on his statements in pursuing the claim.

Still, any false statements intended to influence an insurer to pay a false claim can support a fraud conviction. The boyfriend’s acquittal of burning the vehicle was a separate charge. He still can later be charged and convicted of insurance fraud under the state statue.

Importance: Both rulings broadly support the battle against insurance fraud. Prosecutors and courts are empowered to use state fraud statutes for maximum impact. If other states adopt these expansive views, the requirement of insurers to prove they relied upon false statements would no longer would exist.

The intentional making of false statements to an insurer will sustain a fraud conviction. This broad ruling also buttresses the Coalition’s position for broad court interpretation of statutes to support the fraud fight.

About the author: Matthew J. Smith, Esq. is founder and president of Smith, Rolfes & Skavdahl Company, L.P.A. He has practiced for nearly 30 years in the field of insurance law, defending insurers and assisting with insurance-fraud investigations. Smith is a past president of the National Society of Professional Insurance Investigators, current member of IASIU, and legal advisor to the Coalition Against Insurance Fraud.

Anti-fraud Coalition urges Texas Supreme Court to let provider case proceed

court_decisionsAllowing medical providers to hide false claims amid treatment for crash injuries will encourage scams and could discourage insurers from writing business in Texas, the Coalition Against Insurance Fraud said in an amicus brief filed this week with the state Supreme Court.

“Medical providers will remain unjustly enriched and costs will be shifted to not only insurers, but those least-equipped to bear them: policyholders and claimants,” the Coalition stated in a brief filed in the case of Allstate v. Rehab Alliance.

The insurer alleges Houston-based Rehab Alliance recruited legitimate crash victims for false injury treatment. The clinic upcoded treatment, billed doctor rates for work by nurses, and performed unneeded treatment such as MRIs, the insurer asserts. Patients also were secretly told they weren’t financially liable for uninsured treatment, Allstate says.

The insurer paid 107 claims and sued to recover after discovering evidence of fraud. A lower court granted Rehab Alliance summary judgement. Allstate appealed to the Texas Supreme Court.

Rehab Alliance is the changing face of bogus crash-treatment claims, the Coalition said in urging the Supreme Court to send the case back for rehearing by the lower court.

The clinic camouflaged false treatment claims involving legitimate crash injuries. Unlike staged wrecks with fake injuries, this sophisticated disguise makes it daunting to clearly separate bogus from necessary treatment claims.

“The fact that fraud in a particular claim is difficult to detect or quantify does not mean it should be allowed to be perpetuated. The result would be rewarding and encouraging agents of fraud,” the Coalition stated.

Insurers need access to civil courts and the ability to sue fraudsters. Allowing camouflaged injury claims burdens insurers with higher costs that raise premiums. Medical care and the ability of insurers to promptly settle claims will suffer as well.

“If this opportunity to help reverse the tide of soft fraud by medical practitioners is not taken, this kind of fraud will continue to occur. Further, the amount paid for fraudulent claims will increase,” the Coalition said.

Texas will become a haven for such schemes, potentially driving insurers out of the state. Patient care also could suffer from bogus treatment unrelated to healing their crash injuries.

“If Texas cannot provide assurance to insurers and policyholders they are willing to take an effective stance against fraud, insurers become dis-incentivized to maintain large presences in the state, deploy effective anti-fraud measures there and, perhaps, even continue doing business there,” the Coalition stated.

Zeroing in on zero tolerance in combatting insurance fraud



A popular TV series in the early 1950s was called “I Led Three Lives.” It featured a businessman who led a normal family life while secretly being an FBI informant against the Communist party in America. It was based on a true story.

I have had the good fortune to lead three lives since college. Life One was a husband and father. Life Two was in the U.S. Army. I spent four years as a counterintelligence officer. I also served 30 years in the Army Reserve until September 11, 2001. I was mobilized and spent four years back on active duty, retiring as a Major General.

Life Three was in the insurance industry, spanning everything from claims adjuster to executive vice president of a multi-national insurer.

In my Army and insurance careers, I developed a deep appreciation of the value of leadership for inspiring the success of any endeavor or organization.

This included fighting insurance fraud, and developing a culture of zero tolerance of fraud in both claims departments I led during my career.

You probably know the importance of combating fraud to reduce this crime’s high cost to your insurance company and policyholders. My motivation in this crusade was only partly driven by that staggering cost. My driving motivation was my firm believe that it is morally wrong to knowingly pay a fraudulent insurance claim. This belief is one of my personal values.

Values are the bedrock of any organization. Leadership is all about upholding those values. An organization without values has no soul. The Army’s values are:

• Loyalty,
• Duty,
• Respect,
• Selfless service,
• Honor,
• Integrity, and
• Courage.

The Army does an outstanding job of teaching, coaching, living and enforcing these values when needed. Every major U.S. business also has a values statement. If you don’t know your employer’s values statement, it is hardly your fault. Look to your leaders.

Character. The U.S. Army War College defines three elements of leadership: character, competence and the ability to encourage the heart. Character is by far the most important.

Leaders must have strong character. They also must ensure that the employees they lead reflect that character. An insurer that knowingly pays a fraudulent claim also violates its values statement. And certainly the insurer lacks character. The same is true of insurer employees — from the SIU director to claims personnel to adjusters.

Courage. Showing courage also is vital, including physical and moral courage.

Adjusters and special investigators can be physically threatened in the field. They must be trained to deal with threats. Leadership must create protocols for a proper response. It is important that employees know that their company has their back, and will defend them at all costs.

Leaders must provide as safe an environment as possible, whatever that takes.

Moral courage is more-challenging to inspire, yet is equally critical to effective fraud-fighting. Claims staff want to do the right thing. Leaders must support and reward risk-taking in combatting insurance fraud. A key part of risk-taking involves denying false claims, knowing the claimant may respond with a lawsuit.

Anti-fraud program. Leaders must establish an effective anti-fraud program after laying the corporate cultural foundations.

Start at the top. Make sure your CEO is fully aware of the program, and supports it wholeheartedly.

Also educate your board of directors. These leaders must know the program’s moral foundations, plus downside exposures and costs of an effective program.

Higher legal costs are a big part. Most claim denials for fraud result in a lawsuit against the company, no matter how solid your case. A strong anti-fraud position can earn your insurer a reputation within the criminal underworld for being an undesirable target to try and bilk.

This principled stance saves legal fees in the long run. That contention has merit, though I found it impossible to prove with hard metrics. Better to keep the board, which represents your stockholders, advised of known added costs you can measure.

The average paid claim, for example, will increase for lines of business most commonly targeted for fraud: auto physical damage and bodily injury, general liability, workers compensation and property. Why? Because bogus claims settle cheap.

Dishonest claimants accept smaller nuisance settlements and go away — or target their next victims. You must educate the board and everyone else that your average claim payouts have risen, yet real costs have decreased. This is because you paid no indemnity on fraudulent claims. Zero paid claims usually are excluded from average payment calculations.

Another cost includes increased open claims. It’s called a higher pending count, in claim-adjusting terms. False claims are easy to pay and close. Adjusters easily can lower pendings by settling them all. Here again, your traditional claim metric looks good, yet is economically and morally deficient in the insurer’s bigger picture.

Bad-faith exposures are most important from a board perspective. An adverse court decision can have severe economic impact on your company, no matter how just and correct your position. You can’t take those consequences lightly. You must expertly manage such exposures. The board also must accept that a zero-tolerance culture of denying false claims will generate bad-faith actions.

The Korean War Memorial in Washington D.C. has an eloquent quote: “Freedom is Not Free.”

That refers to the courage that made our nation great. An effective, values-based anti-fraud program means you will assume risks. And you will pay costs of having moral courage to make a positive difference for our communities and nation.

Encourage heart. Encouraging people’s hearts is the third leadership element when you present your zero-tolerance strategy to the board. Good leaders influence and encourage everyone around them, including their superiors. “I feel like I have just been through a religious revival,” one board member of my insurance company said after my first presentation on zero tolerance.

Competence. Now let’s cover competence, another leadership element. You must train, equip and sustain a razor-sharp claims operation that can identify, investigate and prove fraud.

It is never enough just to suspect fraud. You must prove a scheme so any reasonably prudent person (especially a judge or juror) will be convinced the claim is false.

Most major carriers now deploy effective tools such as predictive analytics to detect scams. A leader must champion, lead and budget such efforts.

Those investments are well worth the costs, in my experience. It is part of equipping claim personnel with state-of-the-art tools so they can achieve their fraud-fighting goals.

Training adjusters is your best and most-critical investment. Your special investigations unit can provide most training. Nearly all SIUs are staffed with capable professionals and experts well able to provide excellent training.

Legal team. An experienced legal team is another vital resource. This includes the claim department and General Counsel’s office. The GC reports to the CEO, and manages legal exposures such as bad-faith accusations.

General Counsel personnel thus must be fully involved team members for you to succeed. Their partnership, advice and legal guidance were invaluable to me, especially on more-sophisticated fraudulent claims.

I also advocate ensuring that you obtain proper outside legal counsel to represent your company in court. Retain only lawyers who specialize in fighting bogus claims.

Most insurance claims settle. Zero tolerance means the plaintiff either will drop the claim, or pursue you in civil court. The defense attorney must understand that, and have the intestinal fortitude (guts is the Army term) to litigate and win these cases.

Responsibility. The unit Commander has the highest responsibility and authority in the military. “My fault boys, all my fault!” Robert E. Lee famously exclaimed after his forces were routed in the climactic Picket’s Charge at the Battle of Gettysburg.

That was my attitude as chief claims officer. Denying false claims ranks among the most-serious decisions a claim department makes. You accuse a person of a civil wrong, and a crime. So I always reserved the denial decision for me. It was too important to delegate. The buck stopped with me. My staff knew and appreciated that. It encouraged their hearts, and our success.

Goals, objectives. An effective organization also has well-defined goals and objectives. Clear metrics such as average paid claims help measure our success. Anti-fraud efforts are integral parts of the claim process. Thus fraud-fighting must be tracked and monitored, and corrective actions taken to improve results when necessary.

“Your goal . . . is zero tolerance for insurance fraud while paying every legitimate claim.”

I suggest that your metrics support your anti-fraud objectives, without ever denying legitimate claims for suspected fraud.

Every metric also may be discoverable. So assume all denials and metrics will be discovered in a civil suit, and you should set metrics accordingly.

Your goal, or Commander’s Intent in military parlance, is zero tolerance for insurance fraud while paying every legitimate claim.

Avoid having your goals, objectives or metrics misinterpreted to suggest you encourage wrongful denial of legitimate claims. Therefore, it is reasonable and logical to track the number of denials, and make best-guess estimates of how much money those efforts save your company.

What is unacceptable is any hint or suggestion that any employee is measured or rewarded by the number of fraud denials, or money those denials save. Police officers should not have quotas for speeding tickets. Nor should adjusters and SIUs be measured or rewarded for quotas on false claims. Ticket all speeders and deny all bogus claims.

Finally, a zero-tolerance culture will earn your company many positive results. The vast majority of your insureds support zero tolerance. They are honest, hard-working Americans. They know they are the ultimate bill payers. These are customers every company wants to insure. Making fair profits in insurance is about who you insure. This is more important than what you insure.

When you make customers aware of your anti-fraud efforts, they see it for themselves and usually stay with you for life.

Agents and brokers support zero tolerance as well. They are your business partners. They should share your moral commitment to ethical business practices.

All employees — not solely claims personnel — should know and pursue zero tolerance. SIUs should conduct training seminars for underwriters, risk-control personnel, human resource staff and operations personnel, in addition to training they provide the claims department. Such training further embeds zero tolerance into your corporate culture.

Judges also need educating. Most judges consider your fraudulent-claim suit as just another claim to be compromised in the usual and customary way. These judges will do whatever they can to convince or pressure you to compromise and settle. They will not believe your no-pay, zero-tolerance position at first. You will need courage to respectfully tell the judge that paying this claim is morally wrong and you will not settle. When you try the case to a verdict, convincing the judge that your are serious about zero tolerance gets easier the next time.

In conclusion, I always recommend using the Mirror Test. You simply look in the mirror before paying or denying questionable claims. Ask yourself, “Can I look at myself in the mirror, and be proud of what I see?”

Fraud of the Month: Home arsonists try to murder witness

Smoking_gunTyesha Towanda Roberts wanted to help her uncle torch a crony’s home for an insurance payday. Roberts was prepared to help make the insurance plot a grisly murder scene.

The Baltimore woman agreed to provide a false alibi, and help rub out an inconvenient witness.

Bad moves. The Baltimore-area woman will have 20 years to rethink how she unknowingly spilled the murderous insurance plot to a federal informant in a clever setup.

The case shines a light on something that should challenge many people’s belief that insurance fraud is a harmless white-collar prank.

Violence …

Against witnesses … investigators … judges … and other hardworking folks just trying to do fair justice.

Wanted witness shot

Here’s how adroit federal sleuthing thwarted Roberts ….

Her uncle Greg Ramsey agreed to torch a cohort’s home and two vehicles for insurance payouts, the feds say. The home fire seriously damaged the building — and tenants were inside. The fire then spread to neighboring homes. The two vehicles were wrecked, and those fires spread to a nearby church.

As the feds frame what happened next: The arson plot was broken up. The cornered plotters grew desperate. Ramsay would have a prosecution witness shot, he told the home and car owner (known only as “J.R.”).

He also offered to have Roberts lie in court that J.R. was visiting her when the fires broke out.

The trio met to iron out the details. Roberts and Ramsey were doomed.

“J.R.” had secretly pleaded guilty and was stringing them along. Every step now was a trap.

Roberts said she knew people who could finish off the witness. So she was enlisted to procure the hitman. Roberts met with someone she thought was a middleman. The guy was an informant working for the feds. He introduced Roberts to the presumed hitman. He was a federal undercover officer.

The clueless Roberts hooked up the equally clueless Ramsey with the seeming hitman. Ramsay paid the informant $2,000 toward the $10,000 murder fee, and a loaded .357 revolver to finish the job.

Roberts was trapped, and the walls quickly closed in. She pleaded guilty and will receive up to 20 years in federal prison when sentenced in August 2016. “J.R” pleaded guilty to insurance-fraud and arson. Ramsay faces a slew of charges that could lock him away for decades if he’s convicted.

Federal detective work kept the witness alive. Several fraud investigators weren’t so lucky in other insurance schemes.

An unhinged insurance agent doing her duty as well. She was an auditor with the North Carolina insurance department. A troubled agent clubbed her to death with a chair while she was in his office looking into possible theft of client premiums.

Nightclub insurer mogul Jeffrey Cohen plotted to rub out the judge overseeing the insurer’s liquidation. Like fellow Baltimore-area plotter Roberts, Cohen was thwarted just in time.

Cohen deceived regulators into thinking his fizzling insurance empire was financially solid.

A former nightclub bouncer, Cohen drew up a hit list of Maryland and Delaware officials involved with his case. And driving directions to the home of the judge overseeing the insurer’s liquidation.

Seven assault weapons were seized at Cohen’s home. “Society needs to look at the fact that killing isn’t wrong in certain circumstances, and killing culls the weak,” he said in the recording. Cohen was handed 37 years in federal prison.

So when you think of insurance fraud as a soft and forgettable crime … just visit Sallie Rohrbach’s grave. She’s buried in Raleigh Memorial Park in Fuquay-Varina, N.C.

Getting riled up for fraud in Twittersphere


Useful for egging on scams, teaching about dumb choices

Tag team is winning formula for fraud bills


Investigators wield impact as expert constituent voices

A couple of years ago I blogged about how fraud investigators can be key to enacting strong fraud laws.The state legislative season is heating up, so let’s revisit. We need to think of how to mobilize for action.

Lobbying legislators can be top-down and bottom-up.

Top-down involves national groups like the Coalition or insurers raising the issues with legislators. Often we testify before committees or the full chamber. That carries weight. We discuss the big picture, and how a state bill is good (or bad) for combating fraud from a larger viewpoint.

The bottom-up approach is the grassroots level. Investigators and other frontliners can take a lead role.

Investigators can wield great influence. State lawmakers listen to constituents. Local people put a local face on fraud bills. Investigators also are respected crime-fighting experts. That voice speaks convincingly to lawmakers. They may know little about a fraud bill — or the crime it combats.

A tag team is the best formula for rallying support for fraud laws: Local investigators work with national groups like the Coalition. We all bring vital strengths to the table.

State legislators usually don’t receive letters or messages about fraud issues. So when an investigator writes a letter, that could be the first time a legislator hears about the fraud bill, and why it’s good for the state.

This leads to my Rule of Five. One constituent letter raises few eyebrows in a legislator’s office. Five letters, and the legislator thinks about the issue. And 25 letters signals a groundswell of support. That can convince a legislator to support a fraud bill.

Enacting strong fraud laws has four positive goals. 1) Create an infrastructure for insurers to investigate and report scams; 2) Give fraud fighters laws and regs that are pillars for chasing down swindlers; 3) Oppose weak bills that undermine the fraud fight; and 4) Educate lawmakers about the benefits of strong fraud laws.

Together, our influence can place more fraud laws onto the books. We will educate lawmakers about how strong fraud laws benefit consumers throughout a state.

So let’s add a fifth goal for fraud laws: Empower consumers and insurers to better fight back against insurance fraud.

About the author: Howard Goldblatt is director of government affairs for the Coalition Against Insurance Fraud.

A bird’s-eye view: using drones to fight fraud

newyorkdrone2By J. Lyle Donan
January 15, 2016

Momentum continues to build around the ways Unmanned Aerial Vehicles (UAVs, also known as drones) will change a vast number of industries, including insurance fraud.1 What little anecdotal data exists involving drones for fighting insurance schemes has come from workers compensation and disability fraud. UAV technology was adopted early on by some private investigators.

Although the FAA only started providing exemptions for commercial drone use in Septembimageer 2014, the lack of enforcement of vague regulations offered little to deter some private investigators from using drones to enhance their surveillance and evidence collection. A private investigator accessed private rural property to capture images of a man suspected of insurance fraud, reported the New York Post last year. Though the suspect claimed he was fully disabled, the PI’s drone took photos of him allegedly engaged in heavy physical activity. Such a photo op had eluded the investigator because she couldn’t access the property and the suspect disguised his healthy medical condition with ploys like walking with a cane while in public spaces.2

Other reports of PIs (and drone enthusiasts) describe using fixed-wing UAVs that can travel on auto-pilot to a preset location where they can slowly fly above a target undetected while obtaining high-resolution photos and video. Tim Wilcox of International Investigations predicts drones will help cut losses due to workers compensation fraud.3 Surveillance often is key to gathering evidence in workers comp or disability fraud investigations. Drones can provide quicker, cheaper and safer surveillance and documentation. They eliminate the risks involving physical trespass, reduce investigator visibility in rural settings and provide access to otherwise inaccessible areas of interest. However, insurers and private investigators may face more strict regulations as drones integrate into America’s airspace. A bill in California, for example, would consider it trespassing to fly a UAV over a property at or below 350 feet.4 Recent cases of UAVs for combatting property-insurance fraud are harder to come by. Yet fraud fighting will benefit tremendously from advances in other drone applications, especially in catastrophe responses. Organizations dedicated to research and testing UAV applications in emergencies and catastrophes are developing technology and processes that will enhance property-insurance fraud responses.

Weather-related claims

imageUAVs can quickly and efficiently survey a large area. This will make deploying drones after a catastrophe easier, faster and safer, because they will bypass many obstacles met by catastrophe responders on the ground. Damage from many weather events or catastrophes follows a predictable pattern, with the heaviest damage concentrated in the primary area (such as the center point in a ripple with hail and earthquakes, or the direct path in the line of the storm, as with wind and flooding).

Whether the peril moves in a ripple or wave, the less damage occurs the farther you move out from the center. A post-storm UAV survey can follow this pattern beginning with areas of greatest damage and moving out to areas of little to no damage.

Experience has shown us that fraud occurs most aggressively on the periphery of a weather event’s primary damage area, especially with an extended delay from the loss date. The farther out from the center, and the longer the passage of time, the greater the risk of fraud.

Drones will document the damage in disaster-stricken areas by focusing on the hardest-hit neighborhoods first. They also will survey the whole area, including the periphery where there likely is little to no damage.

Documenting data on properties in the area immediately after a storm will provide added information to compare with data collected weeks or months later during an inspection of a specific property.

This offers an improved solution to the obstacles created by the lag time that often occurs with weather-related claims. If no hail damage was captured by the high-resolution photos taken by a UAV 24 hours after a hailstorm, then the apparent damage to the roof a month later may need further scrutiny.

Accessing this post-storm UAV data will allow carriers to triage claims immediately after a damaging weather event, and claims that are sure to trickle in after a short or lengthy time. This data will provide invaluable evidence for suspicious claims.

In addition to viewing high-resolution images, insurers and others also will be able to process that data further.

For example, 3D point clouds can be created from geo-tagged photos collected by the UAV post-storm. These models can help measure any length, area or volume of interest. One example is the area of a roof surface or water depth during a flood. The ability to immediately collect data from the UAV after a storm, combined with post-processing capabilities, will provide more-advanced comparative data than ever.

Doppler radar is the current data source for generating storm reports used for weather-related losses. Yet radars cannot scan at the earth’s surface. Ground-level data thus is needed to determine what the weather was like on the ground. Crowd sourcing is one means of collecting this data. But UAVs offer a more-reliable alternative to collecting the ground-level data needed to accurately determine where weather struck and what damage occurred.

Drones improve upon Doppler because they can capture this ground-truth intelligence.

Uncovering crop scams

Drones also can help fight crop-insurance fraud. A fraud ring in North Carolina cost taxpayers upwards of $100 million. Fraudsters included farmers, agents and claims adjusters.5 The U.S. Department of Agriculture, which administers the federal crop insurance program, already relies heavily on technology such as weather data and satellite images to monitor the validity of claims. Drones will make it easier and cheaper to inspect crops for damage, collect more accurate data, and use that data in new, beneficial ways.

When a crop-damage claim is made, an adjuster can go onsite to survey and record the damage. But a thorough investigation by an adjuster is cumbersome, costly and time-consuming. A drone can quickly and easily survey an entire field, measure areas of interest, and then use near-infrared and multispectral camera and other sensor technologies to help determine the relative health of the crops.

The technology measures the reflection of light at different wavelengths, and post-processing software can calculate the health of crops by determining the chlorophyll content.

Other applications for fighting crop fraud include using drones to make regular records of crop condition and the condition of fields, and tracking crop growth throughout the year to make year-by-year comparisons. The real-time feedback on crop status can help guard against inflated or altogether false loss claims.

Drones an underwriting tool

“Several private firms like Donan have put tremendous resources toward promoting and legislating drone use for insurance and disaster responses.”UAVs are also a powerful tool for home or business underwriting surveys. UAVs expand the scope of property inspections, without necessarily adding costs or time. They can easily and efficiently collect a wealth of information about a property. This means insurers can better document the condition of a risk before issuing a policy. Drones provide great views of roofs, siding, windows, gutters and other components with a higher resolution than satellites or manned aircraft.

This documentation provides a valuable comparison when claims are filed after a short or extended term into the policy period. For instance, if a claim is filed for damage to a commercial roofing system, a pre-policy underwriting survey by a UAV will provide relevant data such as roof condition when the policy was written, or existing leaks or other issues.

UAVs also may help monitor whether paid claims are translating into repairs and replacements for insureds. Software programs already are being engineered to use drone imagery to determine a roof’s condition. This same technology can easily assess whether a claimant replaced a roof after a hailstorm settlement.

Combating arsons

Fire departments around the world have for many years used drones in fire responses and investigations. Soon this practice will become commonplace in the insurance industry. Fire departments stream video imagery of the fire in action to optimize suppression activities.

Drone data captured during or after a fire can be analyzed to investigate why a fire spread the way it did. Was it wind and ventilation, or fuel, or was a foreign catalyst involved such as a fraudster armed with gasoline? Drones are a cheaper, faster resource to capture the broad view of a fire scene, which can be essential to identifying fire patterns.

Drones also make the perfect platform for observing high-resolution forest fire imagery, and already have proven useful in mapping the debris field following a high-order explosion such as a home or business arson.

Challenges to implementing

Research and development characterizes the present state of most insurer drone programs. That’s because despite the FAA’s awarding Section 333 exemptions to carriers and other industry firms, the restrictions for exemptions limit many situations in which drones can be deployed.

Several exemption restrictions that impact drones’ current usage in fraud investigations include:

  • UAVs can only fly as high as 200 feet — about the height of an 18-story building;
  • UAVs must remain 500 feet from all nonparticipating persons (unless persons are protected, such as under a roof). And they must stay 500 feet from any structure or vehicle unless they have the owner’s permission. That means about one-half to two city blocks (depending on the city). This will allow flights in rural or scarcely-populated areas, yet limit application in densely-populated areas;
  • UAVs must remain five miles from large airports;
  • UAVs must remain within the pilot’s line of sight; and
  • Only daytime operation is permitted.The good news is that UAV restrictions are expected to be loosened when the FAA releases final regulations. Even so, these limitations will require the insurance industry to move forward more cautiously, taking time to test hardware and software and develop solutions that are operationally excellent.Drone research promotedThere is so much overlap both in post-catastrophe data collection by UAVs and in data that will prove most useful to anti-fraud efforts in property insurance. Thus it is easy to see why the current restrictions limit insurer ability to fully realize the potential of UAV technology. However, several private firms like Donan have put tremendous resources toward promoting and legislating drone use for insurance and disaster responses.

    Donan committed resources to a UAV program in early 2013, and since has partnered with carriers to conduct pilot programs aimed at identifying and testing hardware, developing processes and defining applications for using drones. These efforts will speed implementation and help develop industry best practices.

    Several partnerships dedicated to UAV research have formed as well. One is the Property Drone Consortium. It is headed by EagleView Technologies, and members include Allstate Insurance Group, Erie Insurance Group and Nationwide Mutual Insurance Company, among others. The group’s stated goal is to develop property-specific hardware and software solutions in 2015.6 It published research on several topics including operational issues, platform selection and risk management. The research is available on the group’s website.7

    Another group that has conducted extensive research and released findings and recommendations is coordinated by Measure, a 32 Advisors Company. This group includes the American Red Cross, private-sector companies and federal agencies. Insurance giants USAA and Zurich North America also participate. The group’s policy recommendations have strong implications for anti-fraud efforts as well, and are published in full online.8

    Privacy a concern

    Privacy challenges involved with obtaining drone data must be addressed. The FAA is charged with keeping the airspace safe yet has no privacy jurisdiction and has shown little interest in the issue.

    FAA exemptions are problematic because they are so broad. However, we expect these guidelines will be reduced, thus eliminating many current challenges. In the meantime, many states and local jurisdictions have implemented their own laws to fill the gap in privacy regulations. Language making it illegal to use drones for surveillance or reconnaissance is a common theme.

    These regulations could have added impact on UAV applications in fraud investigations and should be monitored for continuing developments.

    Social-media investigations have sparked a growing body of privacy lawsuits and case precedents over the last several years. Given the privacy sensitivities of drone use, it is possible that UAVs will generate lawsuits as well, and a corresponding body of case history to help clarify anti-fraud deployment.

    Wait around, look ahead

    The current environment sometimes feels like being stuck in a waiting game for insurers and companies like Donan that have committed resources to UAV research and testing. And to a great extent this is a waiting period.

    Much of UAV implementation depends on what FAA guidelines will permit us to do, and we all have minimal influence over the FAA.

    Though actual application of UAV technology is currently limited, this time is ideally suited for fine-tuning and perfecting our UAV programs: researching hardware, developing processes, creating best practices, training operators, and understanding how to apply cutting-edge software. This waiting time allows us to determine the best use of these tools, so when the FAA says go, you can guarantee we’ll be ready to go.

    And “go” also includes going after fraudsters.

    About the author: J. Lyle Donan is President & CEO of Donan, a nationwide forensic investigation firm and industry leader in the research and development of unmanned vehicles.