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?”