Dealing with Postcatastrophe Fraud

By Gary Kerney

Considering current economic conditions, the impact of a natural disaster can be especially chaotic and ruinous for communities, families, and policyholders. Experts predict that a catastrophe event, such as a hurricane or earthquake, in the metropolitan areas of New York City, Miami, or Los Angeles could inflict insured losses in excess of $100 billion, potentially generating 10 million claims from a single extreme event. The widespread threat is very real on many levels, and the individual, social, business, and insurance ramifications are mind-boggling.

Since the four Florida hurricanes struck in 2004, PCS estimates that all catastrophes in the United States have resulted in approximately 15 million claims through 2008. PCS declared no U.S. hurricane catastrophes in 2006 and 2007, and catastrophe claims in those years totaled $2.3 and $1.2 million, respectively. In the other three years (2004, 2005, and 2008), when hurricane activity was above normal, catastrophe claims numbered from 3.4 to 4.4 million claims. Hurricanes alone have caused estimated insured property losses of nearly $100 billion since 2004. Those claims are in addition to other claims insurers handle throughout the year, such as fire and theft.

In the face of the financial crisis now affecting the United States, fraudulent claim activity is expected to increase. The condition of many mortgages, the high level of unemployment, and the pressure many people feel to maintain the status quo create financial hardships that can sometimes lead to fraud. Given the large number of claims and the substantial monetary losses from extreme events, it is reasonable to anticipate sizable fraudulent claims in the often chaotic postcatastrophe environment.

Add to that the realities of recent catastrophes. The time needed to repair or replace damaged property is growing. Material and labor resources have been overwhelmed in recent years. It is not uncommon for a property owner to find that it may take two to three years to fix a house. Or the homeowner learns that the cost agreed to make the repairs a few months ago is now inadequate and more money is needed. Those frustrations can lead people to make bad decisions and look for other ways to get needed cash.

Another big frustration has been the issue of hurricane damage — more specifically, damage caused by wind and water. In most cases, without flood coverage, damage caused by surface flooding or storm surge is not a covered peril. Although many people believe that their hurricane insurance addresses all forms of damage caused by hurricanes, it is a rude awakening to learn that damage from floodwater or surge is not covered. Without insurance money, how can the damage be repaired? That dilemma has steered policyholders to fraudulent actions to get money. In the aftermath of Hurricane Katrina, a number of buildings burned mysteriously after being damaged by ­flood­waters. In some cases, damage to roof coverings and other building components occurred after the storm was long gone.

Interestingly, juries have failed at times to convict fraudsters despite convincing cases made against them in court. At the emotional level, people share frustrations in the aftermath of a severe event. Juries may sympathize with a defendant driven to illegal actions by extenuating circumstances. They may feel they cannot convict the accused because under similar conditions they might have done the same thing.

Catastrophe fraud can involve a myriad of deceptions, including producer fraud, duplicate and triplicate claims for preexisting damage, man-made enhanced damage, fraudulent receipts, bogus vehicle thefts, false looting claims, and arson. Catastrophe fraud can be committed by professional criminals, common criminals, and first-time offenders. Regardless, the motive is almost always money.

Policyholder expectations also contribute to fraud. Some insureds look to get a “fair shake” from the adjuster and the insurance company. An adjuster’s skill and competence can give a policyholder confidence in the way the claim is handled. Conversely, an adjuster can cause a policyholder to doubt fair treatment, leading the policyholder to falsify the claim.

For many insurers, a catastrophe antifraud plan calls for initial deployment of the special investigation unit. It’s not surprising that criminals consistently behave like criminals — so investigative professionals can anticipate accordingly. What can be surprising, though, is that the confusion and utter devastation following major catastrophes can cause otherwise upright citizens to consider breaking the law. Frustration and fear underlie that behavior. Some people believe it is the only way they can resurrect their lives after disaster strikes. With so much turmoil and confusion, some people just cannot think straight. This is not to condone the behavior but rather to point out that fraud should be assumed to be an innate part of the disaster recovery process.

For example, in the aftermath of Hurricane Katrina, a man in New Orleans claimed his Cadillac Deville was flooded, but the claim was denied after an inspection showed no flood damage. He then left the inspection site, filled his car with water from a hose at a service station down the street, and brought the car back for reinspection.

He was later arrested, but what if he had waited two weeks for a new inspection? And what if the inspection site’s computers were down and none on the staff were present that were there two weeks ago? The adjuster may have known that residue in the floodwater would contaminate everything and that clear water would be a strong indicator of fraud. But it’s hard to know how the process would unfold under urgent, extenuating circumstances, especially when the pressure and scrutiny to pay ­post­catastrophe claims is high.

Other Katrina examples involve adjusters discovering hotel charges for nonexistent rooms (number 602 in a hotel that only has five floors), a claim for a room with a queen-size bed in a hotel that offers only single and king-size beds, and claims for hotel room charges with no associated tax. Adjusters picked up on those discrepancies because they took the time to investigate.

Insurers need to be prepared for any catastrophe loss and ensure that their catastrophe managers, adjusters, SIUs, and claims personnel are well coordinated, responsive, and available for fraud-fighting efforts, in addition to other concurrent responsibilities during a stressful period. Without an SIU catastrophe plan and strong operational collaboration, insurers can be highly susceptible to fraudulent claims after a catastrophic event.

Meanwhile, policyholders must recognize the importance and the true value proposition of property insurance. As property owners with investments on the line — especially in catastrophe-prone areas — they must realistically evaluate their coverage needs. One cannot expect to resolve coverage issues after the loss has occurred. Proper preparation before a hurricane, earthquake, flood, or tornado is the best protection.

Gary Kerney is assistant vice president of ISO’s Property Claim Services (PCS) Division.