Proving the Negative: Fraudulent Theft Claims

The incidence of suspicious and fraudulent theft claims is on the rise. At the same time, the methods and techniques employed in connection with these claims have become more diverse and more sophisticated. The claims representative faces new challenges in the investigation and handling of these losses in order to bring them to a proper conclusion.

Fraudulent theft claims are commonly viewed as difficult (if not impossible) to prove. Even in the face of highly suspicious circumstances surrounding the loss, the absence of tangible "direct" evidence in most cases leads to the feeling that nothing can be done to establish a claim as fraudulent. These claims require a deliberate and comprehensive strategy of investigation, but this can - and frequently does - result in the detection and avoidance of fraudulent claims.

• I. Categories of Fraud

  Although the possibilities of fraud are limited only by the imagination of the person involved, fraudulent theft claims fall within two general categories.

  A. The Inflated Loss
  Perhaps the most common form of fraud in connection with a theft claim is the inflated or "padded" loss. This includes the fraudulent inflation of values for items claimed, as well as the inclusion of items which were not stolen or were not even owned by the insured. The motives for this type of fraud range from an attempt to merely cover the policy deductible to the hope of realizing a windfall profit following a misfortune.

  B. The Staged Loss
  The second category of fraudulent theft is the staged loss. While an inflated loss starts out as a true loss, the staged loss is fraudulent at the outset. The underlying "loss" is not a loss at all. In this situation, the insured seeks to realize a pure profit from the claimed loss of items which were, in fact, never stolen.
  

• II. Patterns of Fraud: The Red Flags

  The key to successfully investigating fraudulent theft claims is the ability to identify and recognize suspicious factors in claims. The identification of a claim as fraudulent comes only after the thorough investigation of a questionable claim. In order for a claim to be deemed questionable or suspicious, there must be some indication of impropriety in the claim. The claims representative must learn to recognize the "red flags" of a suspicious claim which warrant further investigation. Some of the generally recognized "red flags" of a suspicious theft claim are outlined below.

  A. Size of the Loss
  There is no objective measure of the size of a loss which would cause it to be considered suspicious. Instead, this is dependent upon the particular circumstances of the claim under examination. The relative size of a loss in terms of the insured's circumstances or available resources will vary accordingly. However, a loss where all of an insured's property or inventory is stolen should always be closely examined.

  B. Type of Property Stolen
  The particular items of property stolen in a reported theft loss may give rise to suspicion of possible fraud. A loss where virtually all of the stolen property was scheduled should be closely examined. Seasonal items such as clothing from a retail store, summer or winter sports equipment, furs stolen out of season and accumulated inventory in a retail loss situation should all be carefully reviewed.

  C. Circumstances of the Loss
  Unusual circumstances surrounding the loss occurrence should be carefully scrutinized by the claims representative. The absence of any apparent forcible entry in a burglary situation is, of course, highly suspicious. The area of entry in a reported burglary may be highly improbable where it takes place in an open area visible to the public. The fact that the items stolen were primarily or exclusively items insured while uninsured items were left behind should be considered significant in evaluating the claim. A number of large or bulky items taken without evidence of a means of removal (e.g. tire tracks or observations of a truck in the area) should raise suspicions.

  D. Timing of the Loss
  The claims representative should look to the timing of the loss in terms of several factors when evaluating a potential fraud situation. A loss reported after a policy has just been issued or at the point when coverage is about to expire is a classic "red flag" to be noted. A loss which occurs shortly after an insured's divorce or separation should be closely examined. A theft or burglary loss reported immediately after a fire loss or other casualty loss should raise the suspicions of the claims representative. The reported theft of food products or inventory subject to spoilage should be investigated to determine the timing of the loss in terms of such factors. Obsolete, out of date or unmarketable merchandise reported stolen will always raise a "red flag".

  E. Loss History
  As a matter of routine, the loss history of an insured should always be examined. A prior loss history involving similar claims should be a significant factor to be considered by the claims representative. Even a prior claim considered to be perfectly legitimate may become an "incentive" to an insured in financial need and the circumstances of the subsequent loss may be strikingly similar. Prior losses may reveal duplicate items previously claimed which have again been submitted in an insurance claim. A prior claim may serve as a framework for determining the time period within which certain items were purchased as replacements for items previously claimed or may establish items which never were replaced at all.

  F. Duplicate Coverage
  The potential for duplicate coverage should always be examined. The most obvious example is the situation where an insured has two separate policies covering the same property. Duplicate coverage may also be found when investigating an insured's family members or business associates. Credit insurance on items of personal property may serve as the basis for duplicate coverage in a fraudulent theft claim.

  G. Police Reports
  In almost every situation, a police report will be filed in connection with a theft claim. A careful examination of the report and contact with the investigating officer may point out inconsistencies or discrepancies in the reported circumstances of the loss between the insured's statement in the police report and the insured's statement in connection with the claim. A significant difference between the amount of loss reported to the police and the amount reported on the claim should be considered highly suspicious. Different dates and times on the police report should be noted for further investigation.

  H. The Insured's Attitude
  While it is difficult to draw any definitive conclusions about an insured's attitude in presenting a claim, there may be indications of fraud to be discerned. An antagonistic insured may seek to intimidate the claims representative into a quick settlement. An overly congenial insured may seek to divert attention from the suspicious circumstances of a loss. An insured who is seeking a quick settlement of a loss and is willing to take "any reasonable offer" should be viewed with some skepticism.

  I. Documentation of the Loss
  Once again, there may be nothing conclusive to be said about how an insured documents the claim. However, a claim that is over-documented or under-documented may be the first indication of potential fraud. An insured who has no receipts, no proof of payment and no recollection of where items were purchased should cause concern on the part of the claims representative. At the other extreme, an insured who can produce a receipt for virtually every item claimed, even insignificant items, should come under suspicion. Frequently, an insured submitting a fraudulent claim will provide verification of the items claimed almost immediately after the loss has taken place.

  J. Questionable Documentation
  Perhaps the most obvious indication of fraud is the presentation of questionable documentation in support of the loss. Receipts which have been forged or altered are often obvious to the claims representative. Proof of purchase may be similarly suspicious when examined carefully. More than any other area of investigation, this offers the potential to develop objective proof of fraud in connection with a suspicious claim.

• III. Methods of Investigation
  

  Once the "red flags" of a suspicious claim have been noted, the claims representative must undertake a comprehensive investigation into the loss. That investigation may uncover additional suspicious circumstances concerning the loss, leading to further investigation. Certainly, the presence of suspicious circumstances is by no means conclusive proof of fraud. There may be a reasonable explanation or justification for those circumstances which should be considered prior to making a final decision on the claim. However, even where there is no apparent explanation for a suspicious circumstance, a complete investigation must be carried out so as to make the final decision on a claim with the benefit of all available information, as a matter of good faith dealing with the insured. The steps outlined below are not intended to be all-inclusive. The particular circumstances of a loss may require investigation in other areas and by other means, or may not require an examination of all of these issues. Moreover, many of these steps should have already been taken in first identifying a claim as suspicious.

  Still, the claims representative must follow a protocol or system of procedures in the investigation of suspicious claims. The following investigative techniques are offered as a format or "checklist" for the handling of these losses.

  A. Insured's Statement
  The first step in the investigation of any claim, particularly a suspicious claim, should be contact with the insured to obtain a statement about the loss. This needs to be done quickly, while the events are fresh in the minds of the insured and all other witnesses. The statement should be in the form of a recorded or written statement whenever possible. If a recorded statement is taken, it should be stated on the record that the statement is not being taken under oath and is not intended to serve as an Examination Under Oath required under the policy.

  The statement should review, in detail, the complete circumstances of the loss and how the loss was discovered by the insured. The insured should be closely questioned about the items stolen and the values of those items. The insured should be questioned about how the extent of the loss was determined, if that has already been accomplished. The existence of any pre-loss inventory or pre-loss photographs should be determined. The names of all witnesses and all possible suspects known to the insured should be obtained.

  B. Scene Examination
  At the earliest possible opportunity, the claims representative should conduct a physical examination of the loss site. This should be documented by photographs. If possible, the insured should be present to point out the locations where items had been stored or kept which were taken in the theft. The evidence of entry into the premises should be pointed out and photographed. The claims representative should examine all other doors and windows at that time to determine if there could have been any other possible points of entry. Ideally, the insured should be asked to sketch a diagram of the premises and indicate where each of the various items claimed had been located at the time of the theft. Any items which were left behind should be noted, as well as any items which have already been replaced by the insured since the loss.

  C. Investigating Authorities
  Contact should be made with the law enforcement agency (or agencies) investigating the loss. The claims representative should interview the officer who was called to the scene at the time the loss was discovered. The officer should be questioned about the insured's attitude and demeanor at the time the loss was reported, the insured's preliminary statement of loss and any unusual factors noted by the officer. The actions of the officer in investigating the loss and those of any other officers called in on the case should be reviewed. The officers should be questioned about whether the loss is considered founded or unfounded, whether there have been any leads developed or suspects identified and whether the investigation is still active. The officers should be asked if the insured has fully cooperated with them and has followed up with the status of the investigation.

  Copies of the police reports and investigative summaries should be obtained. Any supplemental reports prepared by the officer or the insured should be obtained. Also, a review of the records at the agency should indicate whether there have been any previous reports of theft at this location or by this insured. Copies of all such reports should be obtained.

  D. Witnesses
  After speaking with the insured and the investigating authorities, the claims representative should be able to identify all possible witnesses to the loss. Those witnesses should be contacted and interviewed concerning their knowledge of the loss. All of the neighbors or adjoining businesses in the area should be contacted for statements as to their observations at the time of the loss and any awareness that a loss was taking place. Any unusual activities or observations described by the witnesses should be noted. Witnesses should be questioned as to their familiarity with the insured and the property stolen. The witnesses should also be questioned about any similar losses they have experienced or been aware of in the area.

  E. Agency Records
  A valuable source of information in investigating any claim is the producing agent on a policy. The agent should be contacted and interviewed concerning his acquaintance with the insured, the insured's history with the agency and the agent's awareness of the circumstances of the loss. The agent should be questioned about the circumstances of the issuance of the policy and any contacts from the insured between the time the policy was issued and the time of the loss. The agent should be questioned about any problems with the account, such as premium payment problems. If the agent has handled this insured's business on previous occasions or at other locations, he should be questioned about any claims under those policies. If possible, the agent's file should be examined for any correspondence or notes from the insured.

  F. Company Records
  A company's own records are often the source of valuable information. The underwriting file on the risk should be examined, including the policy application. Any premium payment problems should be noted. Any prior claims with the insured under this or any other policy should be examined. This may establish other defenses to a claim, such as fraud in the procurement of the policy.

  G. Background Investigation
  A background investigation into the individual or business presenting a suspicious claim will enable the claims representative to better understand the insured's situation at the time of the loss. It will also serve to assess the type individual or business the claims representative will be dealing with in handling the claim.

  A proper background investigation includes a complete civil and criminal records check at the courthouse. The property records will identify the assets owned by the insured as well as the liens and mortgages on those properties. Uniform Commercial Code (UCC) filings will list the secured obligations of an insured. A review of the bankruptcy court records for the preceding ten years will identify any bankruptcy actions to which the insured has been a party. The civil actions records, particularly pending actions, will point out significant lawsuits filed by or against the insured. These records may provide an indication of motive for the submission of a fraudulent claim.

  H. Loss Documentation and Verification
  The claims representative must insist on complete documentation of a claim under investigation. Although Proof of Loss forms are frequently utilized for the settlement of uncontested claims, they should be utilized in all claims. The insured should be required to state in writing, and under oath, all of the essential information necessary to evaluate a claim. Contents inventory forms should be provided for the insured to complete with information as to the brand, model, age, condition, value and place of purchase for the items claimed. Receipts, invoices, proofs of purchase and other supporting documentation should be required from the insured at the time the claim forms are turned in. If the forms are not completely filled out, the insured should be required to provide the missing information and document the claim as completely as possible.

  After the claim has been presented and properly documented by the insured, the process of verification begins. The method of verification will depend upon the extent to which the claim has been documented.

  1. Undocumented Items
  Where an insured has been unable or unwilling to document a particular item claimed in the loss, the claims representative will have to take the initiative in verifying or disproving that item. The first step is determining to what extent the item can be documented. If the insured cannot produce a receipt for the item, then proof of purchase should be sought. A cancelled check or charge card receipt should be requested from the insured. The bank or credit card company can supply duplicate records if the insured has lost his own. However, an insured will frequently claim items which were gifts or were purchased for cash. In that event, other steps must be taken.
  The insured should be questioned about the source of the cash used to purchase items of significant value. Where cash purchases of $1,000 or more have been made, the insured should be asked if the funds came from a savings account, loan, gift, trade or sale of other property. Those matters can easily be verified by the claims representative. If the insured claims that he routinely carries large amounts of cash and makes most of his purchases with cash, look at the credit card records and ATM withdrawals to see if that is consistent with those records. If there are a number of small dollar credit card charges or ATM withdrawals, then there is reason to question the insured’s explanation for the lack of any purchase receipts.
  The next step is to seek verification from the store or person selling the merchandise. If the insured can provide any reasonable time frame for the purchase of the item, a review of the sales records kept at the store should uncover a duplicate sales receipt or invoice confirming the sale. If the insured can recall the sales person (or provide a description of the sales person), the day of the week when the sale took place or the approximate total of the sale, including items which may not have been stolen, this will facilitate the search of the store's records. If the precise make and model of the item is known, then the inventory records of the store should disclose whether there was a sale of that item at the time of the purchase by the insured. If the item is under warranty or has ever been sent in for repair, there should be records available to verify the insured's ownership of the item. The manufacturer may be another source of verification through the service and warranty registration records maintained by the company.
  Even where the insured can offer no specific information about the purchase of the item, the claims representative may still be able to verify or disprove a particular item. If the insured can identify the specific store where the item was purchased, it can be determined if that store was in business at the approximate time of purchase, if it sold such the particular model item at that time, or maintained inventory/sales records which would establish a purchase by the insured. Even the least bit of information can be enough to enable a claims representative to verify or disprove a particular item claimed.

  
  2. Documented Items
  Where the insured has provided documentation of specific items claimed, the process of verification takes on a new perspective. The claims representative must then examine the authenticity of the documentation submitted by the insured in support of his claim.
  The claims representative should always question the insured about the source of documentation submitted with the claim. Each and every receipt or invoice should be reviewed with the insured to establish if it is an original or a duplicate. Even where a receipt is dated several years prior to the loss, the claims representative should have the insured identify it as either an original receipt obtained at the time of purchase or a duplicate receipt obtained subsequent to the loss. This is a critical step in the verification process which must be done in every case.
  The verification of receipts or documentation represented to be original entails a great deal of effort on the part of the claims representative. The documentation presented by the insured must be taken to the store where it was issued. It should be presented to the store manager for examination and verification. In most cases, a store will maintain a duplicate copy of a sales receipt or invoice. The claims representative should ask to see the store's copy for comparison purposes. This may take some persuasion where the records are not readily available or are in storage. Hopefully, these records will be maintained on premises and will be accessible to the claims representative.
  Of course, the receipts should be examined and compared with the store's copy to determine if they have been altered in any way. The addition of items on the receipt or the alteration of prices and product descriptions on receipts should be noted. The date on the invoice should be verified with the store's copy and with the preceding and subsequent receipts. Where the date on the sales receipt is not consistent with the date on sales receipts immediately preceding and subsequent to the receipt in question, an explanation should be sought from the store manager. The salesman's identity should be determined from the receipt if possible and that person contacted for an interview. It should be determined if the salesman is acquainted with the insured or has any relationship of a personal or professional nature.
  The store should also have records of service work or repairs on items under warranty. Those records should be examined to further verify the ownership of the property. Moreover, those records may indicate product defect complaints or the insured’s dissatisfaction with the item.
  Finally, the purchase receipt should be checked against the store's records of refunds and returns. Fraudulent theft claims frequently involve the purchase and immediate return of items for a refund. In that way, the insured will have obtained apparent proof of purchase and ownership to be used in a subsequent claim.
  Commercial losses involve a more complex process of verification. At the same time, there is a greater opportunity to verify or disprove the existence of items claimed to have been stolen. The claims representative should request and examine an insured's inventories, shipping receipts, accounts payable, warehouse records, sales records and sales tax records. Inconsistencies in the insured's inventory records with the amount of items claimed to have been stolen should be noted. Sales records and sales tax records will provide documentation of the resale of items which have been manufactured or purchased. Comparison of these records with warehouse records and shipping records should enable the claims representative to confirm the type and quantity of items claimed to have been stolen.
  

  I. Examination Under Oath
  One of the most valuable tools in the investigation of suspicious claims can be found in the terms of the policy of insurance. Most commercial policies and homeowner policies provide for the right of Examination Under Oath of the insured. The policy language will usually require the production of records and documents requested by the company, as well.

  The Examination Under Oath requires the insured to appear and testify, under oath, concerning all of the issues previously discussed. Information which may not be available as a matter of public record can be elicited. The insured's background, insurance history and financial condition can be examined. Information gathered in the preliminary investigation of a loss can be confirmed or developed in greater detail.

  Of course, the insured will be called upon to review in detail the circumstances of the loss. This will provide a definitive, sworn account of the loss in the insured's own words. The insured can - and should - be asked to acknowledge his claim as truthful and accurate in every respect. Where the insured has concealed information or misrepresented facts, this will provide an absolute defense to the claim even though the underlying loss cannot be proved to be fraudulent.

  J. Additional Investigative Resources
  The claims representative should be aware of additional resources available in the investigation of fraudulent theft claims. These resources can supplement the investigation into a loss and sometimes provide information beyond the reach of the company.

  The ISO All Claims Database is a national database of claims maintained and indexed by names of insureds and other parties to the claim (including mortgagees, public adjusters and attorneys). When new information about a claim is submitted for reporting, any prior claims on file involving the same parties will be identified and provided to the reporting company. In this way, the claims representative can identify an insured who has been involved with prior insurance claims which may have particular significance to the claim under investigation.

  Most states have a Division of Insurance Fraud responsible for the investigation and prosecution of insurance fraud schemes. These agencies have extensive resources for the investigation of fraudulent claims, including subpoena process and arrest powers. In referring a suspected claim to the Division of Insurance Fraud, nearly every state provides a statutory grant of immunity from suit to the insurance carriers reporting such claims.

  The National Insurance Crime Bureau (NICB) is an independent investigative agency operating in conjunction with local law enforcement authorities. Although NICB will rarely share information about an ongoing investigation, their efforts frequently result in the identification and arrest of individuals responsible for insurance fraud crimes. Since its creation in 1972, NICB has directed investigations resulting in over ten thousand arrests on criminal charges.

  There are additional organizations and groups, including local organizations, which can provide assistance and information to the claims representative handling a suspicious claim. An awareness of these organizations can facilitate the investigation of claims and the identification of fraudulent losses.

• IV. Defending the Fraudulent Claim
  

  After the claims representative has conducted a comprehensive investigation into the loss, the decision must be made whether the claim will be paid or denied. With the benefit of all available information, an informed decision can be reached. However, the claims representative should carefully review the information that has been gathered prior to making the decision to deny a fraudulent claim.

  The file must contain specific documentation of fraud as outlined above before making that decision. All of the necessary steps should be taken and completed. All witnesses should be contacted and interviewed, preferably by recorded statement. The insured should be required to submit to an Examination Under Oath. Tangible evidence of fraud should be secured and documented in the file. Only at this point should the decision be made to deny the fraudulent claim.

  The denial should be promptly sent to the insured, in writing. That denial should set forth the specific grounds and reasons for determining the claim is fraudulent. The denial letter should be sent to the insured by certified mail, marked personal and confidential.

  After the insured has been informed of the denial of the claim, the claims representative should be prepared to discuss the denial with the insured. Any explanation or clarification offered by the insured should be considered and additional investigation undertaken where appropriate.

  Compromise offers or token settlements should never be attempted prior to denial of a claim. Even after denial, these should be cautiously approached. The potential for allegations of bad faith in such situations is significant.

  A systematic and documented investigation by the claims representative can result in the successful denial and defense of fraudulent theft claims. The resistance to such claims represents the best hope for the insurance industry in combating the increasing incidence of fraud.