The Drumbeat of Fraud

It’s common knowledge that hard insurance markets — typically featuring higher premiums and tighter coverage — correlate with an increased incidence of fraud, as consumers try to find a way to claim as much as they can from a system with tightening purse strings.

By its very nature, fraud is difficult to quantify. Various estimates suggest that between 15% and 30% of all claims submitted to insurance companies contain at least some trace element of fraud. Presumably, this would include the age-old practice of “padding” claims — i.e. guessing too high on values for lost or stolen items, for which receipts are incomplete or are not available.

To put this into perspective, let’s go with the lower number on the scale, the 15% fraud figure that the Insurance Bureau of Canada (IBC) put forward back in 2005. Let’s apply that number to the Cdn$21.5 billion that Canada’s federally regulated insurance companies paid out for net incurred claims in 2008.

That would make fraud a lucrative, Cdn$3.2-billion cottage industry in 2008.

Imagine what consumers might save on their insurance premiums if a significant minority started to claim exactly what the value of the lost or stolen item was worth (I realize there is a lot of fogginess around the concept of “value”). Alas, too many do not. Why not? The answer is simple: they can get away with it.

Put simply, there is so much evidence of potential fraud in the system, claims departments will too frequently lack the time, money or resources required to thoroughly investigate, detect and eradicate it.

And no matter how thorough they may be, investigators often confront a legal system that requires mountains of paperwork to prove fraud, and face trial lawyers who are quick to read “bad faith” into any unsuccessful attempt to prove fraud. There is even case law on the books in which judges say “padding” a claim is an ordinary practice that doesn’t necessarily prove fraud. “Some leeway must be made in allowing for puffery or establishing a negotiating position,” wrote one Ontario judge cited as an authority in insurance fraud cases.

To make matters worse, the federal Privacy Commissioner’s expanding authority over insurance fraud investigations is having the unintentional effect of giving fraudsters an additional layer of protection. Insurance fraud investigators cannot undertake a number of typical investigatory procedures because federal privacy rules require a person’s “consent” for collecting their private information. Some investigation tactics should be exempted from the federal privacy rules, since investigations are by their very nature an adversarial way to gather information pertaining to fraud — an illegal activity — that no fraudster in their right mind would ever voluntarily disclose to an insurance company. Alas, this idea seems to have died on Parliament’s order paper.

If insurance companies can’t root out the less spectacular forms of fraud, maybe they should seek help. The question is: From whom? StatsCan says 46% of insurance companies experiencing fraud don’t report the fraud to police. Why? Police are just as swamped with their other regular duties as the insurance companies; it often isn’t worth their time to prosecute minor forms of fraud. As one observer put it: “These crimes have no emotional tie to the general population. They are faceless, victimless crimes and hence there is no impetus for lawmakers or law enforcers to do anything about it.”

And so the drumbeat of fraud continues to sound.

And yet, this is not a “faceless” crime. We are all victims of insurance fraud through higher insurance premiums. And so it’s time to tackle this issue head-on instead of simply ignoring it.

Lawmakers should be encouraged to give insurers legislative tools to tackle insurance fraud, much in the same way the government passed legislation aimed specifically at the white-collar crime of money-laundering. The new legislation should review and, if necessary, re-define the legal concept of “bad faith.” If insurance companies show due diligence and make an honest mistake in not being able to prove fraud, they should not have to worry about “bad faith” claims. Bad faith is about being malicious, not merely wrong.

Our insurance premiums down the road will thank us for such efforts.