Welcome to the Hall of Shame(rs)

Dennis Jay | Insurance Fraud News

Insurance fraud is an $80 billion a year industrial enterprise, churning out stolen insurance cash with the collective financial force of an overheated solar flare.

Say hello to the newest avatars of avarice, the freshly chosen members of the Insurance Fraud Hall of Shame … the No-Class of 2019.

The shamers are the year’s nine biggest moral pathogens and were dishonored by the Coalition Against Insurance Fraud.

Some shamers think big; their crime rings stole millions with steely audacity and bloated excess. Others are wobbly knuckleheads; their ethical DNA is missing genome coding for common sense. All shamers are convicted, yoked with lifetime criminal records.

These Tyrannosaurus Wrecks play a valuable deterrent role. They add a human face to the stolen insurance dollars. Their crimes call public attention to a brazen theft that many consumers view as a harmless prank. The shamers thus remind us that insurance fraud is a costly drain on all Americans.

Perhaps most important, the convicted shamers are a warning that highly trained fraud fighters are imposing their will. Their deterrent message: The risk isn’t worth the reward. Resistance is futile.

Fire flimflam. Wealthy socialite Claire Risoldi strafed her insurer with $20 million of swollen claims for ruined home possessions after her mansion mysteriously caught fire near Philadelphia.

Risoldi’s bling often wasn’t lost or didn’t exist — or she simply puffed up claims because she thought it was easy to get away with. Risoldi mostly invented $10 million worth of jewelry — blaming brave firefighters for stealing her rocks.

Then came an inflated $950,000 for hand-painted wall and ceiling murals that cost Risoldi a fraction of that amount. Not to mention, hundreds of thousands for draperies supposedly infused with crystals.

Insurance money flew into her bank accounts. Enough to buy more homes, six Ferraris, two Rolls Royces, a Cobra and other vehicles for her and her family members. Then came the final overdue bill: two years in prison thanks to the state attorney general’s effective courtroom pursuit.

Slip-and-fall stumbles. Street people and other down-and-outers were recruited to pretend they tripped on the sidewalks of New York in a $32 million strafing of insurers by a slip-and-fall ring.

Peter Kalkanis recruited hundreds of destitute people who needed spare cash. He coached them on how to fake injuries after tumbling on uneven or cracked pavement. Backs, knees or shoulders were badly hurt, Kalkanis’ troops told insurers. He forced some people to have life-altering — and unneeded — spinal fusions and other surgeries to inflate their claims even more.

Doctors on his payroll did bogus medical exams, and colluding attorneys pressured insurers in order to extract large settlements. Kalkanis awaits sentencing.

Singed scam. A roaring home arson fire began as a faulty $500,000 insurance theft. It ended with the arsonist heat-wrapped in searing flames, staggering from the burning home to die in Scranton, Pa.

Diomedes Ceballos hired his younger brother, Aurelio Ceballos DeLeon, to torch his home. Yet Aurelio knew nothing about fire. He lit gasoline with a lighter and was promptly engulfed by fire.

Aurelio lurched outside on fire; his clothes nearly all singed off. Somehow, Aurelio staggered to his apartment. A friend found him there, dying. Still, Aurelio wouldn’t call 911. His addled brain worried more about the police discovering the arson than about saving his own life. Aurelio died the next day.

Part of a firefighter’s arm was nearly torn off while combating the flames.

Diomedes bought his home for $86,000 and insured it for a $500,000 bonanza. His only windfall was a state jail term, up to 20 years.

For other non-construction related fraud cases continue reading this article.

Avoid Five Common Fraudulent Schemes Used in Construction

Ken Van Bree | Construction Executive | October 13, 2019

Here’s an attention-getting statistic: A typical case of fraud in the construction industry has a median loss of $227,000, according to the 2018 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE) on occupational or internal fraud. This report further showed that the construction industry’s median loss is approximately $119,000 higher than the average fraud losses across all industries.

Construction companies are most at risk for fraud related to corruption (such as bribes and kickbacks), billing related schemes, expense reimbursements, check tampering and equipment or material theft.

This brings up three important questions:

  • What are the fraud schemes affecting your company?
  • How can contractors keep their companies from experiencing these types of fraud?
  • What is the profile of fraudster?

The threat of fraud can never be wholly removed; however, companies should take steps to identify likely fraud schemes they might face. Below are a number of schemes frequently used to defraud construction companies.

1. BID RIGGING AND CORRUPTION

Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study, 42% of the fraud cases examined in the construction industry had an element of corruption.

Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud.

2. BILLING SCHEMES

 The ACFE report indicates that billing schemes account for 37% of the fraudulent activity in construction companies.

The schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee) and purchase of personal items with company funds.

3. EXPENSE REIMBURSEMENTS

The construction industry is subject to the same fraudulent activities faced by almost every other industry when it comes to expense reimbursements. Overstated expense reports accounted for 23% of fraudulent activity found in construction companies.

4. THEFT

The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Jobsites can be in remote areas or some distance from the corporate headquarters and subject to less supervision.

Additionally, materials on jobsites are hard to track and measure during the construction process. Items lying around a jobsite such as lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place.

5. MISUSE OF COMPANY EQUIPMENT

Similar to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.

THE IMPORTANCE OF INTERNAL CONTROLS

 A company must design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties.

For example, the person in charge of setting up vendors should not be the person who approves vendor payments or reconciles bank statements. Moreover, the payroll clerk should not be the same person who disburses paychecks.

Proper segregation of duties applies to all areas of business and can be employed effectively at little or no cost.

Here are some other simple yet effective internal controls that can be implemented with relative ease.

  • Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.
  • Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.
  • Require that materials estimates above a specified amount include quotes from two or more vendors.
  • Make purchases only with pre-numbered purchase orders and match them to receiving reports and invoices before payment is made.
  • Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information.
  • Reconcile contract billings with general ledgers monthly and calculate under billings and overbillings.
  • Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules.

Preparing financial statements on a monthly basis can be very helpful for understanding the health and viability of a business in addition to maintaining a secure control structure.

It is important not to put too much reliance on a single control, but rather have a series of processes that will prevent and detect fraud.

KNOW THE SIGNS

It can be just as important to understand the profile of a fraudster as it is to know the typical fraud schemes. Less than 10% of the fraudsters had been previously convicted of a fraud-related offense prior to committing the crimes examined in the ACFE study.

Additionally, 82% of fraudsters had never been punished or terminated by an employer for fraud-related conduct. This shows that while background checks are useful in screening out some bad applicants, they might not be effective in predicting fraudulent behavior.

Most fraudsters display some warning signs, such as living beyond their means, financial difficulties or having unusually close associations with vendors or customers.

Training for employees, management and auditors to recognize these warning signs is important to help detect fraudulent behavior.

How Contractors Can Prevent Fraud in Their Workforce

Sarah Hofmann | Construction Executive | June 14, 2019

The word fraud might conjure up images of Wall Street executives led out to police cars in cuffs, or sleazy conmen with slicked-back hair. While these ideas might be popular in movies and TV, and often in the news, many small and large businesses fall victim to fraud. Whether it’s a trusted site manager who needed a little extra cash to cover an unexpected bill or the accountant who’s been on board for years and has been slowly siphoning an extra paycheck through a ghost employee each month, fraud might be hitting businesses without them even knowing it. 

The construction industry is hardly immune to such schemes. According to the ACFE’s 2018 Report to the Nations on Occupational Fraud and Abuse, organizations lose an estimated 5% of their revenue each year to fraud. The median amount lost per instance of fraud was $130,000 across all industries, but fraud cases in the construction industry cost almost twice that much at $227,000 per fraud. They also last longer on average: fraud schemes in the construction industry continue for 24 months before being detected versus the overall median average of 16 months. The more time a scheme continues, the more money is lost for organizations. 

WHAT TYPES OF FRAUD SCHEMES ARE MOST COMMON IN THE CONSTRUCTION INDUSTRY?

The construction industry is more susceptible to certain types of fraud than other industries due to the nature of the work. The companies may be smaller in size leading to fewer resources to combat fraud and more trust among employees. Also, construction companies inherently deal with many vendors, subcontractors, bidding organizations and other various third parties, which can all pose fraud risks. 

Here’s how the two most common umbrella schemes of corruption and asset misappropriation affect the construction industry.

Corruption

The most common fraud scheme that affected the construction industry was corruption, representing 42% of all fraud cases. Corruption is defined as the wrongful use of influence to procure a benefit. With all those third parties involved in construction projects, there are many opportunities for corruption. At different points in a construction project, certain individuals may have more influence, such as inspectors or estimators. If they apply their influence unethically, they can be susceptible to bribery or kickbacks. 

Asset Misappropriation

Asset misappropriation is a blanket term for someone either misusing or stealing an asset that does not belong to them. For construction companies, the most common schemes in this category are billing fraud and expense reimbursement fraud, representing 37% and 23% of the fraud cases, respectively. 

Billing fraud schemes can include using shell companies, using company assets to make personal purchases or colluding with vendors. Expense reimbursement can include billing for fictitious expenses, mischaracterizing expenses or submitting multiple requests for reimbursement.

WHY DO PEOPLE COMMIT FRAUD?

The Fraud Triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components that, together, lead to fraudulent behavior:

  1. Perceived financial need;
  2. Perceived opportunity; and
  3. Rationalization.

Financial need may come in the form of a gambling or drug addiction, or perhaps mounting medical bills for a family member. Perceived opportunity can be when they realize they have the power to sign and approve checks. Rationalization is the thought that they’ll pay the money back as soon as they can or that the organization is taking advantage of them and won’t miss that money. If these three factors are present, it does not necessarily mean a person will commit fraud; it’s just that these three factors tend to need to be present for a person to act.

DEMOGRAPHICS OF FRAUDSTERS IN THE CONSTRUCTION INDUSTRY

For fraud schemes in the construction industry, the perpetrators tended to work in the accounting or purchasing department, representing 31% and 11% of cases. Forty-five percent of them were employees, rather than managers (29%) or owners/executives (23%). The largest red flag they displayed was living beyond their means (42%), followed by experiencing financial difficulties (31%), or having an unusually close association with a vendor or customer (22%). 

One thing that set the construction industry apart was that younger employees who committed fraud stole more than older employees. Data from other industries almost always show older employees stealing more money, as they tend to be in higher positions of power in the organization and have more tenure. This may point to construction companies needing to keep a closer eye on newer, or younger, employees.

HOW CAN CONSTRUCTION COMPANIES PROTECT THEMSELVES AGAINST FRAUD?

One of the easiest and cost-effective ways to prevent fraud in any organization is to implement an anti-fraud policy and set an ethical tone at the top. When organizations discuss fraud and teach their employees, and clients/customers, about fraud prevention or detection tools, they are more likely to prevent fraud before it happens. 

Another great way to prevent fraud is to institute a hotline or similar anonymous reporting method. Only 34% of construction organizations in the Report to the Nations used a hotline, versus 63% of organizations across all industries. The most common way fraud was detected overall in the larger study was through a tip (40). Construction organizations only had tips account for 19% of fraud detected. Even establishing a simple anonymous online form, or email address, and telling employees, vendors and clients about it can greatly cut down on fraud.

Are You Being Scammed? — Assignment of Benefits in Property Losses

John Hopkins | Searcy Denney Scarola Barnhart & Shipley | October 12, 201

According to the Coalition Against Insurance Fraud, about $80 billion is stolen every year by unscrupulous companies supposedly acting in the best interests of U.S consumers during critical moments. Hurricane Michael passing across the Florida Panhandle is one of those critical moments.

A type of fraud that seems to be gaining momentum is the “Assignment of Benefits” (AOB). Assignment of Benefits refers to a situation in which a policyholder signs a legal form that allows a plumber, a roofer or a water-removal operation, for example, to deal directly with the policyholder’s insurance company. Sounds convenient and it seems to make sense; let the professionals deal with each other. Right?

More often than not, it is a scam.

“Maybe you’ve just made an emergency call to a water extraction firm after discovering a flood in your kitchen,” a supporting document by the Consumer Protection Coalition reads. “Or a salesperson knocks on your door and asks to inspect your roof, saying you likely have damage due to recent storms. Or a stranger in a repair truck pulls up alongside you in a shopping center parking lot, saying they noticed your car windshield is cracked and it can be replaced on the spot – for free. Scenarios like these play out across Florida every day, and the story is hauntingly familiar. The repair person pulls out a document and says they can fix everything, but first you need to sign here. They promise to work directly with your insurance company, and say you won’t have to worry about a thing. At that moment, alarm bells should go off in your head. If you sign, you could become the latest victim of “Assignment of Benefits” fraud and abuse. And it may prove very costly to you and your family.”

By signing an Assignment of Benefits form, a policyholder gives the third-party vendor outright power to control the claim. The vendor then can falsify the claim and make it larger and more costly in scope. That can leave the policyholder on the hook if the insurance company balks and does not pay the full amount that was fraudulently submitted. Worse, in some cases the vendor can sue the policyholder’s insurance company without the policyholder’s consent.

The bottom line – you lose control over the claim and the repair process involving your own property.

“An explosion of claims and lawsuits involving AOBs is driving up the cost of home and auto insurance across Florida and directly impacting the price you pay,” the Consumer Protection Coalition document reads. “AOB fraud and abuse is real, is growing rapidly – and is already taking money out of your pocket!”

How rampant is the ruse? The Florida Office of Insurance Regulation reports that in 2016, the latest year for which statistics are available, there were 28,000 cases confirmed compared to 400 cases in 2006.

“AOBs have been a part of Florida’s marketplace for more than 100 years,” according to the office. “Loopholes in the way it is being used in the marketplace are driving up costs for homeowners across the state due to unnecessary litigation associated with certain AOB claims. You may be party in a lawsuit against the insurance company if the third party and company are in dispute on the payment amount of the claim. You may be responsible for payment of additional costs if the insurance company does not pay the third party the full amount requested and a lien may be placed on your home if you fail to pay.”

Sadly, more victims of Assignment of Benefits forms are sure to result in the aftermath of the catastrophic storm. Residents whose homes suffered damages or who lost their homes altogether should not be taken advantage of, but that probably will occur one too many times.

“You are most likely to be offered an AOB when requesting emergency repairs or when companies go door-to-door soliciting business,” Citizens Property Insurance Corporation warns. “After a covered loss, your policy requires that you take reasonable emergency measures to protect your property from further damage. Emergency measures include only what is reasonable and necessary to secure your home and prevent further damage.”

Here are steps to avoid getting caught in the trap.

  • Policyholders should be the first and only ones to contact their insurance companies when filing a claim.
  • Even though a third-party vendor might say otherwise, policyholders do not have to sign an Assignment of Benefits form no matter how bad the damage.
  • It is a best practice to photograph and / or take videos of damaged property for evidence and to not allow a vendor to start repairs until after an insurance adjustor has inspected the home as that could place coverage in jeopardy.
  • The insured always should maintain control of the policies they purchased and paid for and continue to invest in for peace of mind. Criminals can take away that peace of mind with a single signature.

And, if all this is not enough, your policy of insurance contains various requirements you are to follow and with which you must comply. Failing to comply with those requirements can affect coverage under the policy. The person to whom you gave over control through an AOB only cares about getting paid and may negate your coverage by failing to comply with those policy requirements.

Insurance Fraud – It’s a Widespread Industry Problem

Emily Marlowe | Property Insurance Coverage Law Blog | February 20, 2018

Fraud is generally defined as an act done with the intent to deceive or misrepresent others in order to attain or secure some unlawful gain or deprive a victim of a legal right. Different courts, states, and bodies of law throughout our country have their own unique causes of action based in fraud, or where fraud is the primary allegation.

Fraud (on behalf of insurance companies) is more common than people realize. As recently as last week, California’s Insurance Commissioner started an investigation into Aetna Insurance Company1 after Aetna’s former medical director admitted under oath that the Insurance Company would deny insurance coverage without ever actually looking at a patient’s medical records. This was Aetna’s custom and practice, as admitted by its former medical director.

This type of fraud is not exclusive to Aetna or medical insurance – this is common in property and disaster insurance as well.

In the aftermath of Hurricane Sandy (2012), we saw this all too frequently. In fact, this issue was so problematic that the New York Attorney General indicted several NFIP flood insurance company engineers and engineering companies for fraudulently altering engineering reports. The flood insurance companies used the fraudulently altered reports to support their denial of property owners’ proper claims for covered flood damages. For example, the insurance company engineer reports originally blamed the flood water for causing severe structural damage to the homes, but the reports were changed to say there was no structural damage, or the flood water did not cause the damage. The changed reports were used by the insurance companies to significantly reduce the claim payout, or outright deny the claim.

This issue is so common and pervasive that insurance industry insiders have blown the whistle on their former insurance company employers. Back in 2006, the Rigsby sisters, who were both former claims adjusters for State Farm, blew the whistle on their former employer and insurance industry titan State Farm. The Rigsby sisters said that after a thorough investigation of property owners Hurricane Katrina claims they frequently would reach the conclusion that the property damage was caused by wind (which would be covered by the property owner’s insurance policy with State Farm), but State Farm would change the conclusion and say that the damage was flood-related, and therefore not covered under the policy. State Farm would entirely disregard the conclusions reached by their licensed adjusters, and fraudulently change the conclusion to avoid payment on the claim. The jury determined that State Farm owed over $4 million in damages related to this fraud.

Insurance Company fraud is not as uncommon as people may think. If you believe that you are a victim of this type of insurance company fraud, you should contact an experienced insurance attorney.
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1 February 12, 2018, California Department of Insurance Press Release, available at http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/statement017-18.cfm (last accesses February 19, 2018).