Insurance fraud raising business costs
Investigators say many scams take advantage of small companies

by Joan Tupponce
for Virginia Business
May 2006

Pete Orr thought he was being smart. He bought a low-cost health insurance plan for his small Florida business. But when he developed lymphoma and leukemia, Orr learned the insurance company, which also operated in Virginia, had shut down. He was left with $250,000 in medical bills.

Orr wasn’t able to find new health coverage for six months. By that time, his condition had deteriorated too greatly to receive a bone-marrow transplant. He died five months later at the age of 46.

Orr was the victim of insurance fraud, the daddy of all shell games. Most victims don’t lose their lives because of fraud, but the havoc wreaked by insurance scams is felt throughout the economy. “Right now insurance fraud in the United States is costing $80 billion to $85 billion a year,” says Frank Dunton, director of the investigations department for the Virginia Farm Bureau. “It comes back to each of us [individuals and businesses alike] because it raises insurance premiums as well as the cost of goods and services.”

Virginians pay an additional $200 to $1,000 in insurance premiums each year because of insurance fraud, according to the Virginia State Police. “Fraud has always been around, but we are detecting more of it now,” says Lt. Roger Rector, coordinator of the State Police Insurance Fraud Program, which was created in 1999. Last year, the number of arrests for insurance fraud and related crimes in Virginia reached 306, an increase of 150 percent from 2004. The number of fraud convictions rose 20 percent to 72. The most common insurance fraud in Virginia is false or inflated property claims on homes, automobiles or businesses.

Insurance fraud is clothed in as many guises as a quick-change artist. The schemes affecting business range from the sale of fake business liability and health insurance policies to “swoop and squat” scams in which crooks cause costly rear-end collisions with commercial vehicles. “The extent of [the problem] surprised me when I got into working with insurance fraud,” says Ray Seal, senior special agent in the insurance fraud unit. “The number of notifications we are receiving from insurance companies and our hotline are increasing each year.”

Crooks selling fake health insurance coverage target small businesses like Orr’s. The insurers appear legitimate because they advertise in local newspapers, through direct mail or on television. Marketing materials have a professional appearance. “These [people] have a slick sales pitch,” says James Quiggle, spokesman for the Washington-based Coalition Against Insurance Fraud. “[They] sell worthless health coverage, exploiting the desperation of the business to find affordable health coverage.”

Such schemes leave in their trail hundreds of millions of dollars in unpaid medical claims, forcing some companies to close their doors. “[This type of fraud] can wipe out a person’s life savings, leaving depression and despair that doesn’t go away,” Quiggle says.

Mila Kofman, associate research professor in the Health Policy Institute at Georgetown University, is credited with being the first person in the country to document the cycle of health insurance scams. “There are always scams but during certain periods we see an influx of criminal activity,” she says. “That usually coincides with rising premiums.”

When premiums undergo double-digit increases, businesses and consumers are more vulnerable to fraud. “They want affordable health insurance, and that makes them look at alternatives,” Kofman says. “Between 2001 and 2003 we saw huge national scams that sold phony coverage in every state.”

The Government Accountability Office, an investigative arm of Congress, found that “at least 15,000 employers, including many small employers, purchased coverage from unauthorized entities, affecting more than 200,000 policyholders from 2000 to 2002. The states reported that more than half of the organizations they identified frequently targeted their health benefits to small employers.”

Some of the businesses defrauded refused to talk with Kofman about their losses. “They were embarrassed because they felt that they were sophisticated purchasers, and nonetheless they were still duped,” she says.

These crooks are clever. “They are very good at fooling normally astute businesspeople who should know better,” notes Quiggle. “Often they will hire experienced health agents to create the appearance of legitimacy.” In some cases when the scheme is uncovered, the agents will claim that they have been duped as well.

Some fake companies, in fact, initially will pay small claims in order to appear legitimate. The scam kicks in when a business tries to make a larger claim. “Once the bills pile up, you are no longer a profit center so they cut you off,” explains Quiggle.

Companies typically find out about the scam when a medical provider calls to complain that the health plan is not paying bills. “The crooks will trot out excuses such as it was an accounting glitz or a problem with the software,” Quiggle says. “They promise they will straighten it out, but they never do.”

In recent years there also has been a spike in the sale of fake liability coverage. Con artists in this business target small businesses that may have a difficult time finding affordable coverage. Roofing, long-haul trucking and construction companies are among the businesses considered high-risk because their accident rates often exceed those of other industries. “Crooks realize that these small businesses are paying top dollar for liability coverage, and that they will grasp at straws, so they exploit them by selling the fake coverage,” says Quiggle.

Businesses can combat this type of fraud by looking for warning signs. For example, does the agent seem pushy or evasive when you ask questions? When you ask if the agent is licensed, does he dodge the question? Does coverage appear to be overly generous for the cost of the insurance in comparison to well-known companies? “Anyone can print out an official looking policy on a home computer,” says Quiggle.

Another type of fraud, involving workers’ compensation, is committed by the insured rather than insurer. “Firms are hiding employees in complex networks of straw firms or lying to insurers that employees in risky jobs actually work in safer ones,” says Quiggle. “Some businesses simply don’t pay state-required premiums or avoid reporting employee injuries. Businesses cooking their books to reduce comp premiums is a large crime trend that also steals billions.”

The cases can be so complex that many “state prosecutors lack the will or expertise to pursue crooked business owners in court,” adds Quiggle. Examples of workers’ compensation fraud include business owners who refuse to buy state-required coverage or lie about payroll numbers. “Premium fraud gives an unfair competitive advantage to cheaters,” says Quiggle. “By illegally lowering their premiums, their lower overhead lets them under-price honest competitors’ products at the cash register or when bidding for contracts.”

Another type of fraud involves staged auto accidents, such as the “swoop and squat” scam. In this scenario, two or more people cause a rear-end accident by pulling their car in front of a moving vehicle and then stopping abruptly. “Swoop and squats directly affect businesses,” Quiggle says. “It’s not unusual for [these people] to target commercial vehicles because they know they will be covered by insurance and have higher policy limits. The vehicles are maneuvered into a crash and suddenly this innocent business has bogus claims against their insurance.”

One auto accident ring working in Northern Virginia cost insurance companies more than $1 million in false claims, recalls Rick Germroth, supervisory special agent for the Washington field office of the FBI. “They wrecked over 60 automobiles and filed 120 false claims,” he says. “They would rent trucks and take them out to a remote area of the county and then stage an accident. They made claims against the insurance company and the truck company. They also set up multiple policies on one car so they could submit the claims to different insurance companies.”

In another example, Russell Eley and Tony Royall, special agents with the State Police insurance fraud unit, investigated an organized crime ring that staged 15 wrecks. “The settlements exceeded $80,000 total,” says Eley. “They would ram cars into each other and file claims. They would bring children up in another car and then put them in the [damaged vehicle]. They would use them to inflate the claims.”

“[People who commit insurance fraud] are creative people,” says Royall.
Currently in Virginia, anyone who provides information on insurance fraud that leads to an arrest is eligible for up to $25,000 reward from the The Sharp Eye Reward Program, part of the insurance fraud program.

No one really knows how much fraud is being committed each day. “The more we work in this area, the more we recognize [the growing problem],” Rector says. “This reward program is something we can do to help stem the growth.”