According to the Coalition Against Insurance Fraud, billions in fraudulent claims are made every year in the U.S. This includes all types of insurance, from personal auto to workers compensation to homeowners to health care. It’s also worth noting that any exact estimate is likely conservative, since a lot of fraud goes undetected and unreported. Everyone loses when fraud is committed since it slows the investigation and payout of legitimate claims, increases premium costs for honest policyholders, and, in some cases, puts innocent people in danger.
Whether it’s a suspected false claim or exaggerated damages, insurance fraud can put even the most seasoned claims professional on alert. Insurance claims fraud generally falls into two categories: hard fraud, where a policyholder has deliberately manufactured a claim; and soft fraud (sometimes called opportunity fraud), which happens when a claimant exaggerates a legitimate claim in order to receive more money or benefits. In most states, insurance fraud is a felony punishable by fines and jail time. Worse, a false claim can damage a company’s business and reputation. That’s why it’s essential to properly adjudicate every claim to ensure its authenticity. There are many different types of insurance, and most businesses carry business interruption—or business income loss—coverage.
When a company is unable to operate due to a covered loss such as fire or flooding, its business interruption insurance provides revenue while the business is closed. According to the Insurance Risk Management Institute, there are three types:
• Business interruption insurance compensates policyholders for lost income during the period of restoration, or the time necessary to repair physical property damage.
• Extended business interruption insurance covers the business for income lost after the property is improved but before income returns to pre-loss level, typically for a finite period.
• Contingent business interruption insurance covers the insured’s income loss not to the property, but to the property of vendors or suppliers, or to the consumers of its product.
What to Watch
When it comes to fraud, business interruption claims schemes typically involve one of three approaches. Keep an eye out for these scenarios.
Overstating revenues. Overstating lost revenues is a way for claimants to inflate their insurance payouts. For example, one company that was recently investigated in an insurance defense matter used financial records to show a dip in revenues in the year of loss. Those decreased revenues, as compared to prior years when sales were strong, were the basis of a claim for damages in excess of $1 million. However, an analysis of the detailed financial records showed that business had slowed significantly in the eight months prior to the date of loss and, thus, had no proximate cause to the accident. The analysis and findings resulted in a significantly reduced payout.
Understating saved expenses. Manipulating business expenses is an easy way to show increased profits and enhance a business’ financial statements. For example, owners can hold expenses and wait to book them, or improperly capitalize the expenses instead of applying them to the profit and loss statement. Furthermore, hiding variable costs among general and administrative (fixed) expenses is common in fraudulent or overstated business interruption claims. Thus, when a business interruption claim is filed, the company appears to be generating more profit than it is, which, in turn, leads to a higher insurance payout. Another common red flag to look for? Continuing net losses reported on tax returns while also claiming significant lost profits for insurance purposes.
Overstating extra expenses. Padding an insurance claim may seem like an easy way to increase an insurance payout, but it is still fraud. An example of this would be a business owner who suffers a legitimate loss due to a natural disaster but then pins other, unrelated expenditures to the claim to increase the payout.
Although most policyholders are honest, it only takes one crooked claim to defraud insurers out of thousands—even millions—of dollars in dishonest payouts. Here are seven red flags that might indicate fraudulent business interruption claims.
1. The claim is made shortly after the policy was activated, or after an increase in the amount of coverage.
2. The policyholder has previously asked the agent speculative questions about the types of loss events on which the coverage would pay out and the claim at hand involves a similar scenario.
3. The company has a record of ongoing reports to the IRS that it is suffering financial loss and generating very little revenue, yet the business interruption claim reports an excessive loss.
4. In a loss that involves fire, theft, or vandalism, the claim includes recent expensive purchases, yet the claimant cannot produce receipts or other proofs of purchase.
5. The claimant attempts to rush the claims process.
6. The policyholder’s financial documents contain irregular or questionable information, such as out-of-sequence receipts; altered dates, descriptions, or amounts; photocopies of documents instead of the originals; and receipts, invoices, and shipping charges do not show a “paid” stamp.
7. Claimants refuses to provide substantive financial source documents to support the claim (e.g., a copy of her accounting software, bank statements, customer invoices, or vendor bills).
When investigating a business interruption claim, it’s important to note that the presence of any of these red flags does not constitute fraud. Rather, it’s merely an indication that the claims professional should thoroughly investigate the claim so that the suspicion may be either confirmed or dismissed. If, when reviewing a claim, red flags of fraud are identified, claims professionals should report their concerns to their carrier’s special investigation unit or fraud prevention department for further inspection or consider hiring a forensic accountant to analyze the claim. It’s critical that the claim be investigated correctly to ensure that any fraudulent activity is deterred or prosecuted swiftly.