Protecting Policyholders from Insurance Carrier Fraud: Organizations That Can Help
/What is the first image that pops into your mind when you hear the phrase “insurance fraud?” Is it someone committing arson, or damaging covered property to get insurance money? If it is, you’re not alone.
We’ve been conditioned to think of “insurance fraud” only occurring from people making claims. The National Association of Insurance Commissioners (“NAIC”) says “insurance fraud” occurs when “an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain.” So the other side of the coin is also true: insurance companies also commit insurance fraud.
One example, explained below, spawned the birth of the American Policyholder Association, who’s mission is to promote honesty, integrity, and best practices for insurance carrier claim handling.
While you don’t hear about insurance carrier fraud as much, it happens. What follows is just a few examples:
In 1990, the chief executive of a large Texas insurance carrier was arrested in Barbados (shown below) for insurance fraud exceeding $50 million by continuing to rake in premiums with no ability to pay claims.
In 1998, the FBI raided a carrier’s headquarters and found the carrier altered engineering reports to systemically underpay claims resulting from the Northridge earthquake in southern California. The photo below shows a small part of the damage. A former carrier employee joined a civil suit against the carrier, and said altering reports was a standard practice, “not isolated occurrences,” according to a statement published by the Los Angeles Times. The former employee complained about the alleged practice to carrier officials, who later denied it had occurred.
On June 3, 2000, it was reported a carrier’s former employees came forward after the suicide of one of their co-workers to hold the carrier accountable for its actions that led to co-worker taking her own life. The allegations against the carrier included:
Being told by management to “take that route,” referring to suicide after the employees reported an out-of-control workload;
Piling more work onto one employee after the carrier’s own doctor diagnosed her with carpel tunnel syndrome;
Being fired for reporting to management the carrier was paying less than fair value on certain claims; and
A program fraudulently discouraging people from hiring attorneys to help them with claims, which instructed adjusters to lie to people by telling them the same amount of money would be paid regardless if an attorney was involved, when in fact, the carrier’s own research showed the opposite.
In 2003, the United States Supreme Court reversed a $1 million compensatory and $145 million punitive damages verdict on behalf of policyholders due to a carrier’s failure to settle claims made against the policyholders arising out of a motor vehicle collision in which the carrier failed to settle. The Court held single digit ratios between punitive and compensatory damages are more likely to comport with due process, while still achieving the State's goals of deterrence and retribution, than awards with ratios in a range of 500 to 1 or 145 to 1. After being remanded to the Utah Supreme Court, a $9 million punitive damages judgment was entered in favor of the policyholders. The carrier’s conduct leading to the original verdict included the following:
The carrier challenged the admissibility of evidence in its direct appeal to the Utah Supreme Court (and lost), including the carrier using predictable experts, engaging in hardball litigation tactics, and discrimination on the basis of sex and race. Campbell v. State Farm Mut. Auto. Ins. Co., 2001 UT 89, 70, 65 P.3d 1134, 1155 at n. 13 (“Campbell”);
Despite assurances from the attorney hired by the carrier to represent the policyholders their assets were safe and did not need to retain separate independent counsel, the attorney informed the dismayed policyholders after the verdict “you may want to put a for sale sign on your property to get things moving.” Id. at 7, 65 P.3d at 1142;
There was also evidence the carrier instructed its attorneys and claim representatives to employ “mad dog defense tactics,” and use the carrier’s resources to “wear out” opposing attorney’s by prolonging litigation, making merit-less objections, claiming false privileges, destroying documents, and abusing the law and motion process. Id. at 31, 65 P.3d at 1148;
The Utah Supreme Court also noted the difficulty of changing decades-long policies of fraudulent and dishonest claim handling that had become ingrained corporate culture, and also noted the harm perpetrated by the carrier was extreme in light of the statistical probability the carrier would likely pay such damages only once in 50,000 cases; Id. at 62, 65 P.3d at 1154.
The U.S. Supreme Court noted the carrier implemented a “Performance, Planning, and Review” (“PP&R”) policy in 1979 with the explicit objective of using the claims process as a profit center on 1st and 3rd party claims, which functioned as an unlawful scheme to delay benefits owed to consumers by paying out less than fair value in order to meet preset, arbitrary payout targets designed to enhance corporate profits. Campbell, 538 U.S. 408, 431, 123 S. Ct. 1513, 1527-28, 155 L. Ed. 2d 585, 610 (2003);
The carrier attempted to insulate itself from liability by systemically destroying internal company documents that might reveal its scheme, even though it had a historical department containing a copy of all past manuals on claim-handling practices and the dates each manual was changed. Other evidence showed claims management ordered the destruction of a wide range of damaging material in past bad-faith litigation, and went through great lengths to stop the creation of these documents in the first place. Id. at 435, 123 S. Ct. at 1529, 155 L. Ed. 2d at 612.
Other common tactics used by the carrier included falsifying or withholding evidence in claim files, unjustly attacking the character, reputation, and credibility of a claimant, and making notations to that effect in the claim file to create prejudice in the event the claim ever came before a jury. Id. at 432, 123 S. Ct. at 1528, 155 L. Ed. 2d at 610; and
Testimony from former employees demonstrating the carrier put them under “intolerable and recurrent pressure to reduce payouts below fair value,” and at times “forced [them] to commit dishonest acts and to knowingly underpay claims.” Ample evidence showed the carrier’s policy was purposefully designed to “prey on consumers unlikely to be able to defend themselves,” such as the elderly, the poor, and those least knowledgeable about their rights. Id. at 433, 123 S. Ct. at 1528, 155 L. Ed. 2d at 611.
In 2004, a carrier generated nearly $4.32 million of $4.8 million dollars in campaign contributions to an Illinois Supreme Court candidate. In 2005, after the Judge won the election, he was the deciding vote to overturn a billion dollar class action judgment against the very same carrier. In 2018, while denying any responsibility, the carrier settled a racketeering suit against it for 25% of the original judgment. Full details can be found here.
In 2008, the United States Supreme Court decided a West Virginia case under similar circumstances as the Illinois judge described above, and held due process under the 14th Amendment requires a judge to recuse where a serious, objective risk of actual bias is present, such as a litigant before the judge contributing such a high percentage toward the judge’s election campaign.
In 2006, a three-month investigation into an auto carrier’s claims practices revealed the carrier was systemically deceiving policyholders from hiring attorneys to represent their interest in the hope the carrier would save money. As a result of this conduct, the Washington Supreme Court ruled the carrier was engaged in the unauthorized practice of law, and held the carrier to the same standards as a practicing attorney.
Similarly, in 2002, the Arkansas Supreme Court held discouraging policyholders from hiring an attorney was sufficient evidence of “ill will.”
In 2007, an 18-month investigation found injury victims who challenged carriers’ offers in motor vehicle collisions with little property damage would be left with no option but to go to court and be drug “through the wringer.” This became known as the “MIST” defense from the following slide that was one of the 12,500 documents referred to below:
The investigation revealed part of the carrier’s overall strategy was to make fighting the carrier so expensive and time consuming attorney’s helping injury victims would give up. One such injury victim gave her experience of being in one of these collisions and sustaining a herniated disc and muscle tears resulting in medical expenses and lost wages totaling about $15,000. Due to the carrier’s attorney emphasizing the MIST defense and the jury assuming the injury victim had already been compensated by the carrier (which she had not), the jury returned a verdict in the amount of $1,500.
The investigation found the MIST defense was carefully developed to make injury victims look like they are trying to defraud the carriers, rather than the other way around. The scientific validity of using a “no damage, no injury” type argument has been tested and found to be a myth. There are a number of risk factors for short and long-term consequences predictive of whether someone is hurt in a collision, which cannot be accurately applied in a one-size-fits-all manner as the carrier’s strategy implemented. Other results of this investigation are included below:
From 2008-2010, a carrier’s license to sell insurance in Florida was suspended for failing to comply with a subpoena from the Florida Office of Insurance Regulation (“OIR”). The Florida Court of Appeals noted the carrier’s potentially criminal failure to provide the OIR with the requested documents prevented an investigation into whether the carrier was defrauding its policyholders. This resulted in the carrier making public nearly 12,500 documents produced in an overhaul of the company’s claims department in the mid-1990s, which showed the carrier adopted a “zero sum economic game” whereby the carrier aggressively pursued increased profits at the direct expense of its policyholders. A national market conduct examination followed the release of these documents.
As a result of this investigation, the Consumer Federation of America (“CFA”) reported in 2012 carriers manipulate data by using computer claims evaluation software to broadly underpay claims, and thereby increase corporate profits. The report found the software program utilized by carriers, which generates a dollar figure for intangible elements of damages based on similar claims, is capable of being manipulated based on how much revenue the carrier wants to make.
In 2011, the Arkansas Supreme Court described this conduct as “a program of economic warfare regarding regarding small soft-tissue-bodily-injury claims” that showed “a willingness on the part of [the carrier] to use low benefit offers and the threat of protracted litigation as tools to discourage these small claims.”
In 2010, a Rutgers Law Professor wrote a book titled “Delay, Deny, Defend,” detailing the systemic fraud committed by carriers, which gives the complete picture of how carriers cheat (including several of the examples given herein), and what you can do to protect yourself.
In 2013, several of the nation’s largest mortgage insurance carriers agreed to a $15 million dollar fine to resolve allegations from the Consumer Financial Protection Bureau (“CFPB”), who found homeowners’ mortgage insurance was inflated in some instances due to back-room deals struck between banks and the carriers. The carriers were paying the banks a portion of their profits, which violated the federal Real Estate Settlement Procedures Act, which the CFPB is in charge of enforcing. The effect of these kickbacks was found to raise the price of insurance.
This resulted in the government getting involved, and questioning how Federal Emergency Management Agency (“FEMA”) was overseeing flood insurance. When the Vice President of Claims for the carrier was compelled to testify whether he knew the reports were shams, he took the 5th Amendment. A FEMA adjuster admitted to being pressured to systemically underpay claims. The carrier’s lawyers were even fined more than $1 million dollars for the cover up. 60-Minutes covered the story, as follows:
In 2015, a carrier agreed to pay $44 million to settle allegations by the federal government the carrier had issued fraudulent crop insurance policies ineligible under the U.S. Department of Agriculture’s federal crop insurance program (which is in place to protect farmers suffering crop losses due to natural disasters). Other allegations included the carrier backdated policies, forged farmers’ signatures, accepted late and altered documents, whited out dates and signatures, and signed documents after relevant deadlines.
In 2016, 60-Minutes reported 25 of the nation’s largest life insurance companies agreed to pay $7.5 billion in back death benefits, but 35 carriers refused to pay anything, and remained under investigation for not providing benefits when the beneficiary was unaware of a policy (which is common). The Florida insurance commissioner led a national task force investigating the industry, and found the carriers had actual knowledge in their files people had passed away, yet the carriers’ neglected to initiate an investigation and pay claims.
In 2018, a CBS investigation found up to 66% of the funds in the National Flood Insurance Program (run by FEMA), which is to pay claims, goes instead to private insurance companies and their hired attorneys to fight flood claims.
In 2019, a report showed auto carriers are using law enforcement to intimidate their own policyholders to keep claims costs down, even for Vietnam veterans. Financial incentives provided to to scores of police departments, prosecutors, and other public agencies by carriers encourage these departments to focus on insurance fraud, a crime that has traditionally not been a priority for local law enforcement. In some cases, these giant carriers even cover the salaries of dedicated prosecutors, detectives, and investigators whose caseloads consist primarily of referrals from those same companies, which results in dozens of premium-paying customers across the country facing jail time for doing nothing more than filing a claim for damage to their property.
The widespread fraud in the claims process after Hurricane Sandy resulted in the formation of the American Policyholder Association, a nonprofit watchdog group who’s mission is to protect policyholders from insurance carrier fraud.
The APA is a non-partisan organization that transcends party lines. The executive director is a Marine Corp veteran who was a financial advisor when hurricane Sandy displaced his family. Despite having enough flood insurance for the loss, it took seven years for him to get his family back in their home because of the carriers’ fraud described above. He realized there were thousands, if not more, who were worse off financially than he who were being victimized by unscrupulous and immoral insurance carriers. That is when he decided to do something about it for all the policyholders unable to stand up for themselves against the vast financial strength of the carriers, which resulted in the APA being established, further explained below:
If you’re interested in joining the APA’s fight against insurance carrier fraud, click here.
Another great insurance consumer organization is United Policyholders, which was co-founded in 1991. The spark for UP was an urban area wildfire that destroyed 3,000 homes in Northern California. In the aftermath of the disaster, the residents struggled with serious and unexpected gaps in their insurance coverage and a claim process that was often adversarial (which is against industry standards, customs, and practices). Similar to the APA, UP was formed to help level the playing field between carriers and policyholders.
UP’s work is threefold. First, it provides tools and resources for solving insurance problems after a loss or other adverse event. Second, it promotes disaster preparedness and insurance literacy through outreach and education in partnership with civic, faith based, business, and other non-profit associations. Third, it advances pro-consumer laws and public policy related to insurance matters. Their website has a large collection of studies, reports, and articles on insurance issues and industry practices, a few of which can be found below:
Essential Protections for Policyholders, which discusses a roadmap every state can follow in improving homeowners insurance;
Underinsurance in mature economies: reasons and remedies, confirming many behavioral factors can actually be influenced or even reshaped by the insurance industry’s actions;
Shining a Light on Insurer Misconduct, discussing an NAIC model act and its design to illuminate how the cloak of secrecy in a carrier’s disclosures in civil litigation, which would also provide compelling evidence of information whose existence carriers have long denied;
The Regulation of Insurance Claim Practices, describing the failure in the insurance market for claim practices, the failure of the regulatory responses to that failure, and the ways in which litigation can provide a partial corrective;
(You’ve got to) fight for your right (to independent counsel). Who’s defending who?, discussing the “tripartite relationship” between an at-fault policyholder, their attorney, and the insurance carrier;
In 2011, the Arkansas Supreme Court decided in our firm’s favor in a pro-bono appeal on this issue. A liability carrier employee, who was also a lawyer, attempted to represent its at-fault driver in a lawsuit brought by one of our clients for injuries sustained in a motor vehicle collision. The Court held the carrier’s in-house counsel’s representation was prohibited by statute because it would have allowed the carrier to unlawfully practice law, and recognized the inability “of any person to faithfully serve two masters.”
50 State Survey of Bad Faith Insurance Laws and Remedies, discussing the law in all 50 states that defines rules that apply to carriers’ claim practices and the available remedies for when these rules are violated;
The Truth About Car Insurance, discussing research about factors that raise rates and what you can do to keep yours low;
Insurance Law as Public Interest Law, suggesting that insurance laws and regulations serve the public interest by enabling insurance to assist the very same unrepresented and underrepresented groups that public interest lawyers are often concerned with: the poor, minorities, the elderly, consumers, employees, and other marginalized groups;
Low Ball: An Insider’s Look at How Some Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims, discussing how insurance carriers use computer programs to reduce the market value of claims;
Punitive Damages Against an Insurer for the Bad-Faith Handling of a First-Party Claim, discussing a categorical list of articles and case studies related to punitive damages against a carrier for the bad faith handling of a first-party insurance claim; and
Demonstrating and Preserving the Deterrent Effect of Punitive Damages in Insurance Bad Faith Cases, illustrating the social desirability of the punitive damages doctrine by demonstrating its efficacy in reforming unfair insurance claims practices.
Here are UP’s resources for Arkansas. If you aren’t an Arkansas resident, you can access UP’s state-by-state database here. If you’re interested in supporting UP’s fight against insurance carrier fraud, click here.
Stop and think about the need for these two organizations for a second. It is against the law to not have certain types of insurance, such as liability car insurance. Since the law requires every driver to have insurance, a carrier will get your premium dollars or you’ll be breaking the law seen below:
You realize others may not comply with compulsory liability insurance laws, or may not have bought enough insurance, so to be careful you purchase your own personal insurance. You realize another carrier may not treat you well, but are sure your own carrier is honorable enough to keep its word. After all, they’re “like a good neighbor,” and since you have their coverage, you’re in “good hands” and are adequately “protected from mayhem.” But when mayhem arrives, you discover the good hands of your good neighbor spent a lot of effort building a fence instead of a pathway to help. Your disintegrating peace of mind makes you wonder what your premium dollars purchased.
You never thought it would be you, but you find yourself in the position of needing an attorney to protect you from your own insurance company. As if being run over once was not bad enough, which altered your ability to enjoy your hobbies, work, and care for your family, you discover the litigation process is like being run over a second time. The integrity of everyone helping you is consistently challenged as the carrier’s lawyers make it seem like you’re a liar, cheater, faker, and what is wrong with America. As you get more discouraged by the litigation process, you wonder if this is really what the Civil Justice System looks like?
And then it hits you like a ton of bricks. The carrier does this to everybody in the hope policyholders or other claimants just give up. At that point you realize your case is bigger than just you. You realize by standing toe to toe with the carrier and proceeding to a jury to decide your case, you’re standing up for all of those other people the carrier bullied into giving up who might not have had the stamina or wherewithal to stand up for themselves.
And rather than accepting the carrier’s insulting low-ball offer, you know its better for a jury to tell you the value of your claim rather than accepting an offer systemically designed to be underpaid. Because all you want is a fair shake, you can live with whatever the jury decides, know the Civil Justice system should work this way, and hope it does.
