AS insurance rates climb, consumers get angry and blame the industry. But new battle lines are being drawn against an expensive, less-recognized culprit: insurance fraud, which last year indirectly cost Americans some $17 billion.
The industry blames declining ethics of consumers; critics counter that insurance companies aren't doing enough to fight fraud, and are pocketing more profits however insurance premiums increase.
Eight to 10 cents out of every dollar consumers pay for insurance premiums goes to cover inflated or fraudulent claims, estimates Wendell Harness, director of Insurance Crime Prevention Institute (ICPI) in Westport, Conn. The only crime committed more frequently, says Harnass, is income tax evasion.
ICPI is funded by 440 property and casualty insurance companies. This is part of a growing effort by government and industry to combat fraud by setting up hot lines, publishing newsletters, and planning secret ``sting'' operations to catch crooks.
The issue takes on special importance at a time when the insurance industry is under financial strain in a weakening economy, and faces continuing public pressure to reduce rates.
``A lot of people think it's a victimless crime... but in reality the costs are passed on to consumers,'' says Jon Crosby, director of the fraud division in Florida's department of insurance. ``Companies will tell you they have a built-in formula to absorb fraudulent claims.''
Staged auto accidents and phony medical bills are increasing the most rapidly, up 73 percent from 1986, according to the ICPI.
Medical claims are fraudulent 10 to 20 percent of the time, costing $50 billion to $100 billion every year, industry sources say. Fraudulent charges range from unnecessary tests to organized schemes involving accidents that never happened.
Deceitful auto claims are also growing. Last year about 1.5 million cars were reported stolen nationwide; 15 percent of these were attempts at fraud, says Tim Kett, spokesman for the National Auto Theft Bureau (NATB) in Chicago. On the increase: ``owner give-up,'' where an insured person arranges with a third party to have his vehicle taken and then reports it stolen.
By setting up ``sting'' operations in cities across the country, the NATB has uncovered organized rings - where cars are dumped in lakes, abandoned, taken to ``chop shops'' to be stripped of parts, or exported.
WHY the increase in fraud? Hard times and soft morals, experts say. Strapped with debt, owners of cars, homes, and businesses find quick cash in insurance settlements. A public opinion survey published last month by the Insurance Information Institute showed that among the American public, 31 percent agreed that padding a claim (auto, medical) was acceptable to cover deductibles.
Fraud fighters are popping up across the country. Eight states have state law enforcement agencies that investigate claims and prosecute offenders. The oldest of these is in Florida, where director Crosby says his unit has 41 full-time investigators to handle its 1,100 cases,
Of these cases, 60 percent were reported by the industry (state law mandates that companies report suspected claims to the investigators); 20 percent were from consumers who suspect corruption, and the rest were from law enforcement agencies that suspect insurance benefits to be the motive in a crime.
Metropolitan Property and Casualty Insurance Company in Warwick, R.I., established a 24-hour hot line - 1-800-922-FRAUD - that consumers can call to report suspected insurance fraud involving any insurance company. The hot line has received only 30 calls since it opened in June, and 12 leads have led to ``successful'' investigations, says Ray Cinieri, manager of special investigation unit.
Skeptics say these fraud fighters do more talking than acting. ``Some of these [industry] groups are only public relations ploys,'' says Robert Hunter, director of National Insurance Consumer Organization, a nonprofit consumer advocacy group based in Alexandria, Va. ``From their economic point of view, it actually pays to have more fraud.''
Fraud doesn't hurt insurance companies, says Mr. Hunter, because the companies simply raise their rates accordingly. Says Hunter: ``Most companies would be afraid of competition, but not insurance companies. They aren't covered by antitrust laws.'' The McCarran-Ferguson Act of 1945 gave states the right to extend this exemption.
Several state legislatures are looking at laws to restrict the insurance industry. So far only California has passed legislation repealing the antitrust exemption for insurance companies.
Congress is also paying attention. A bill sponsored by Rep. Jack Brooks (D) of Texas would forbid such practises as unlawfully monopolizing the market, tying together unrelated products (life and auto insurances), and price fixing. It passed out of the judiciary committee in the last session and will come before the House in January. Says Linda Lipsen, legislative counsel for Consumers Union, publisher of Consumer Reports: ``We're seeking to apply the rigors of the market to the business of insurance.''