Following is an article by Ron Lowe, retired Loss Adjuster. It first appeared in the September/October 1995 Edition of the Australian and New Zealand Institute of Insurance and Finance Journal. Other than the impact of inflation on the figures the issues it raises remain current today. 
In 1862 at the AGM of the Queen Insurance Company [1], the Chairman, Bernard Hall, remarked that there was one evil he had observed common to all insurance companies.
That was, when a large and disastrous fire occurred, there was a desire on the part of each company to rush forward and make a settlement without that proper investigation which he thought was necessary. This, the companies felt, called upon to do in order to stand well with the public. It was surmised, at least, that many claims thus paid, were for fraudulent losses. What Hall desired to see was an independent agency to investigate their losses. He wished to see, for the appointment of that independent agency, some form of legislation.
So what is new? It is reasonable to assume that competition for new business in the market place is as fierce now as it was in the middle of the last century. Therefore, insurers still walk that difficult line between marketing and morality.
The prime reason for an insurer’s existence is to make money. They do this by providing a much needed service product to the community and there is no doubt that the commercial world, in particular, would have difficulty in functioning without that product.
Because of the nature of the product, and the nature of the human personality, circumstances arise whereby the proper investigation of a claim may not make economic sense in the short term. This situation forces an insurer to consider a decision which is not based on economic grounds. I will provide two examples which also raise other aspects in relation to the investigation of an insurance claim.
Example 1.
The insured couple and their three teenage children resided in a modest rented dwelling. This family all went to work and school as usual and, when the 15 year old son arrived home at around 4.15 p.m., he found that the front dining room window had been broken. He notified the next door neighbours who, in turn, notified the police and the insured.
The insured advised the Police that a quantity of jewellery had been stolen and it was valued at $26,480.
There had been similar burglaries in the area around that time and the police had no reason to suspect that this was not a genuine burglary. They subsequently arrested two young girls who admitted to other losses in the area but did not put their hand up for this one. Attempts to raise latent fingerprints were unsuccessful. The next door neighbour had been asleep during the day and heard nothing.
Of course, this is a familiar event for all of us and it does, perhaps, provide an example of where the various inquiries into a theft of this nature start and finish. The role of the police is to establish whether a crime has been committed and, if so, to obtain sufficient evidence to prove beyond a reasonable doubt that an offender has committed a crime.
On the other hand, whether it be a fire, theft or some other loss, the adjuster is primarily concerned with establishing whether or not the insured is implicated either by undertaking the event or, alternatively, arranging for someone else to do so on the insured’s behalf. This being a civil matter as distinct from any criminal implications, the onus of proof resting upon the insurers is, in theory, lower. That is, the insurers would need to convince a court that, on the balance of probability, the insured was implicated. I say in theory because, for larger losses, courts tend to put insurers to the test to such a degree that most insurers would not contemplate contesting the issue in court unless they had at least a 70% chance of success. In matters of fraud this is not always easy as, more often than not, the insurer’s case is based upon circumstantial evidence only. After all, how many people admit to having committed fraud even when the weight of evidence is against them?
So, back to the burglary. The police inquiry had nowhere else to go. There were no witnesses or suspects. It appeared the insured had sustained a genuine loss. The adjuster established the following:
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The jewellery had allegedly been wrapped in a handkerchief and placed under some linen in the top drawer of a dressing table in the main bedroom. No other items were stolen;
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The majority of the jewellery forming the subject of the claim had been valued first by XYZ Jewellers then insured. This theft had occurred during the first period of insurance;
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There was no other documentation, photographs, receipts, etc. to substantiate the existence of the jewellery, most of which had allegedly been purchased overseas for cash;
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The insured submitted a similar claim for $17,685 against a previous insurer four years prior to this loss. In that previous claim, the circumstances were the same, that is the jewellery had been wrapped in a handkerchief and left under some linen in the top drawer of the dresser in the main bedroom. XYZ Jewellers had also valued the majority of that jewellery and there was no other supporting evidence. The jewellery had been added to that policy two months prior to the loss. The insurer cash settled for $14,000;
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With regard to the present loss, during the initial interview, the adjuster obtained purchasing details in relation to all of the jewellery and, when the claim form was subsequently completed, there were many discrepancies between the purchasing information set out on the claim form as compared with information provided at the original interview;
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The adjuster was aware that the jeweller who submitted the valuation was a suspected receiver. The adjuster had been involved in investigating two previous claims whereby people in possession of stolen items had been apprehended by the police and, in both cases, they had stated that they were attempting to obtain valuations on those items on behalf of XYZ Jewellers; and
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The valuation for the present loss was just below wholesale cost. In other words, even if the insurers had elected to meet the claim by replacing the jewellery, it would have cost them more that the actual submitted claim. This is a ploy utilised by professional claimants to obtain cash.
So there we have it. The fraud indicator lights were flashing. The adjuster conferred with the insurer not only in relation to immediately instructing a solicitor but as to the future handling of this claim. The adjuster was of the view that he could probably buy out of the claim with some hassle and heartburn for around $18,000. However, the adjuster wanted to proceed with insisting that the insured substantiate the purchase of the jewellery. The adjuster also felt that a survey should be undertaken with the industry to establish whether any other insurers had paid, or were facing similar claims from, clients whereby the only evidence produced to support those claims was in the form of a valuation from XYZ Jewellers.
At this point, the insurer faced a difficult decision knowing that inquiries of this type are labour intensive and, therefore, expensive. However, they had a reluctance to pay the claim and decided to proceed. The results of these and other inquiries were interesting as they revealed the following:
- Some of the larger items of jewellery on the submitted claim were almost identical in weight and rough description to those on the previous claim;
- The survey conducted amongst other insurers found that 23 claims had been submitted by various insureds whereby the only evidence produced to support those claims was in the form of valuations prepared by XYZ Jewellers.
- These claims totalled almost $250,000. (I would suggest a true figure would be far greater than that if all claims had been identified);
- One such claim was submitted by one of the insured’s employees and another by the insured’s brother;
- Some valuations, although signed by the jeweller, were, in fact, written out on the jeweller’s letterhead by the insured;
- The jeweller had a retail shop but the date on one valuation was Good Friday;
- Of those cases investigated, XYZ Jewellers were unable to provide a copy of the valuation given to the insured. Indeed, where expensive items were allegedly purchased from that jeweller, there were no purchase records and any information provided by the jeweller differed from that provided by the insured concerning these alleged sales;
- There was a consistent theme which ran throughout these claims. With one exception, the losses occurred within the first 12 months after the valuations were prepared. The only exception was for jewellery which was uninsured at the time of the valuation but when it was subsequently insured, it also was stolen within the first period of insurance; and
- All claims had been, or were in the process of being paid and, apart from this one, all the others were subsequently paid.
The Cost
Quite clearly, the insurer had to resist the claim, which it did. The insured instructed a solicitor and the battle lines were drawn. After four days in the County Court, the insured caved in. It was agreed that each side would carry their own costs. The legal costs for the insurer were $28,300. The investigation costs for the insurer were $7,000. The insured’s legal costs were $36,000. In other words, a claim which could have been settled for, less than $20,000 ended up costing the insurer over $35,000. If the insurer had lost the case and had to pay the insured’s costs as well, the insurer could have been looking at an ‘all up’ pay-out of around $90,000.
No doubt the insurer’s accountant would view this exercise as an economic disaster and recommend that such a practise be discontinued. What would the shareholders think? On economic grounds they would agree with the accountant, however, on moral grounds they may have other thoughts. As for the claims manager, well he should regard it as a victory. This was one that didn’t get away and, at the same time, a message was sent out to a particular section of the community that making an insurance claim is not necessarily an easy way of making money. It was easy, however, until this claim was defended because those other 23 claimants collected almost a quarter of a million dollars and received an inherent message that the next time they needed some easy money, they could simply make another insurance claim.
If we didn’t have over 150 insurance companies but, rather, only had one insurance company in Australia, would the accountant of that company, or indeed the shareholders, hold the view that it was not an economically viable exercise? It is doubtful. Admittedly, the function of an insurer is not to be a moral watchdog, however, I believe that insurers do have a duty to ensure that any fraudulent claims are strenuously denied rather than adopting the attitude that it is better from a marketing viewpoint to let a few slip through than to line the pockets of adjusters, investigators and lawyers.
The example we have just been through raises other questions. Should the file be handed to the police? The answer is yes. Was this a concerted conspiracy by a large group of people to rip off insurance companies or did the word just get around that, for a few dollars, this jeweller would provide a false valuation? How widespread is this practice? Certainly, if the insurer in this instance had simply acquiesced, then the claims would have continued to be paid. As it was, the jeweller went out of business and it is rumoured that he left the country. Hopefully, the insured would have difficulty in arranging further insurance cover!
The point I wish to make here is that many companies go their own way fighting individual battles not aware that they may be part of a large scale war. As we proceed towards a paperless society with no proposal or claim forms, there is no reason why we cannot utilise the new technology at our disposal, and I write here of computers and flow charts, to detect these scams. And we must do so in full co-operation with each other and the police.
Example 2.
In another recent example, the insured was a property developer and purchased a large country property which had on it an old hayshed and a 50-60 year old weatherboard dwelling. The farm machinery was normally left in the hayshed but, on this particular night, it was removed from the shed, then shortly after midnight, the hayshed burnt to the ground. The claim, including hay, was $20,000. No investigation was carried out and the insurers simply handed over $20,000.
Six months later, the dwelling burnt down and a claim was submitted against the same insurer although a different adjuster was appointed. That adjuster did not ask whether the insured had sustained any previous losses nor did the insurer tell the adjuster about the hayshed fire. The insured did not volunteer any information concerning that previous loss. Once again, no proper investigation of the fire cause was conducted on behalf of the insurer. The insured was asked to obtain a quotation which just exceeded the sum insured of $70,000. This was a reinstatement cover. Notwithstanding that the property was purchased by the insured for investment purposes, the insurer took the word of the insured that the insured was to proceed with reinstatement and immediately paid out the sum insured. The insured did not proceed with reinstatement.
This insured received a total of over $90,000 for two fires in old buildings, which, most likely, did not add any value to the property as a whole.
The insured subsequently purchased another rural property upon which there was standing a very old, run-down, weatherboard dwelling. Because of its position, it was difficult to find a tenant for the dwelling or, indeed, resell the property. The first attempt to burn the property failed. The second attempt at 2.45 a.m. was successful. This was a new insurer who conducted an investigation, the results of which left little doubt, on a circumstantial basis only, that the fire had been deliberately lit.
The claim was denied and the matter was contested, both in relation to privilege of documents and avoiding indemnity under the policy. As the matter of indemnity was about to be heard, the insured threw in the towel.
This claim was for a sum insured of $25,000 on an indemnity basis which, if successful in court, would probably have exceeded $30,000. Legal and investigating costs for the insurer were $40,000. The insured’s legal costs were around $30,000. In other words, as we saw in example one, the insurer’s costs exceeded the sum insured. They won but they lost. They also took the risk that, if they had lost at the hearing, they may have been up for a figure of around $100,000.
There is a very strong possibility that this insured deliberately lit the three fires. He even made the comment that he did not have any difficulties with the previous two claim settlements. If this insured had collected another $25,000, would he have been stopped there? Quite frankly, I do not believe so. Once again, I believe that insurers must take the bit between their teeth to stop this insidious practice conducted by a small section of our community. Because, in the long run, ignoring the problem only encourages people to do it, particularly when times are tough.
[1] Cato-Carter, E.F. (1984) Order Out of Chaos London: The Chartered Institute of Loss Adjusters.
Author
Ron Lowe - Retired Loss Adjuster
E-mail address for Ron Lowe: magiclantern@optusnet.com.au
Insurance Policy
Country: - Australia
Policy Description: - Various
Insurer: - Various
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