Insurance companies and law enforcement agencies chase down people who file bogus claims
A hidden video camera was rolling when Thomas Brown stepped out of his doctor’s office.
After injuring his left shoulder in a work-related accident in 1997, Brown had successfully pressed a worker’s compensation claim against his employer’s insurance company, San Diego-based Golden Eagle. But Golden Eagle became suspicious when Brown’s claims that he could not move his left arm did not match the typical symptoms of the kind of injury listed in the original medical report.
A detective hired by Golden Eagle was put on Brown’ s tail, surreptitiously videotaping him as he went to his doctor’ s office with his left arm in a sling. And the detective was still taping when Brown left the office, removed the sling and used his left arm to drive home. In fact, for the rest of the day, Brown used his left arm with no apparent pain or impediment.
After Brown was confronted with the videotape, he pleaded guilty to two felony counts of insurance fraud and was sentenced to 30 days in jail in December, besides having to repay $29,000 of the $49,800 he had received from Golden Eagle.
“He doesn’t have to pay it all back because part of the claim was legitimate,” says Sam King, who leads Golden Eagle’s investigative team.
Brown’s case is part of a growing wave of insurance-fraud prosecutions, King says. Last year, Golden Eagle’s 23-person investigative unit, bolstered by a free-lance pool of about 75 private eyes, participated in 46 arrests of insurance-fraud perpetrators — up 28 percent from the 36 arrests generated in 1998.
“The number of arrests was definitely a record for us — and probably a record for the industry,” King says.
Similar increases occurred at the insurance fraud unit of the San Diego County District Attorney’ s Office. Worker’ s compensation fraud cases rose 10 percent in the fiscal year ending June 30, 1999, with 71 defendants going to trial. Auto-insurance fraud cases rose nearly 20 percent to 116 defendants.
Why are prosecutions increasing? Part of the reason may have to do with growing public tolerance of fraud — an apparent reaction to the growing cost of insurance.
A 1997 poll by the industry-backed Insurance Research Council, or IRC, showed that 36 percent of Americans thought it was all right to overstate insurance claims to make up for the premiums they have paid in the past. In 1993, only 19 percent believed that was acceptable. Forty percent in 1997 thought it was acceptable to pad an insurance claim to offset the deductible they would have to pay, compared with 22 percent in 1993.
But an even more important reason for the rise in prosecutions is that insurance companies have been boosting the amount of money they spend targeting fraud cases.
“It’s not my sense that fraud is going up any faster than the population,” says Don Lyons, who heads the Western region of the GEICO insurance company from its regional headquarters in San Diego. “But the industry is getting more aggressive in its fight against fraud.”
Between 1992 and 1996 — the most recent date for comprehensive figures — insurance companies’ expenditures on fraud detection and prevention tripled from about $200 million in 1992 to at least $650 million in 1996, according to the IRC.
Government also is chipping in. Last year, for instance, California’ s quasi-governmental Workers Compensation Fraud Assessment Commission earmarked $28.5 million to probe fraud cases, with half the money going to state investigators and half going to local district attorneys’ offices.
California drivers also contribute $1 each to combat auto-insurance fraud each time they register a car.
During the past five years, each licensed insurance company in California has been required to contribute $1,000 each year to the Special Operations Fraud Program, designed to investigate fraud involving health, life and property insurance, including arson.
Additionally, the Clinton administration has pumped millions of dollars into a program dubbed “Operation Restore Trust,” to crack down on health-care fraud. In 1998 alone, the program helped boost health- care fraud arrests by 16 percent.
Fueled with such funding, “detection and enforcement is getting better,” says Dominic Dugo, a deputy district attorney who is the assistant chief of San Diego County’ s insurance fraud division.
The wave of fraud cases involves all lines of insurance. Locals who were prosecuted in the past year include:
Michael Palmer, a San Diego landlord who owns about a dozen rental homes in Southern California. He recently pleaded guilty to repeatedly vandalizing them to collect about $380,000 in insurance claims.
Igor Snarsky of Mira Mesa, who pleaded guilty to running an auto-collision ring of nearly 50 people throughout Southern California, including 31 in San Diego. Authorities say the ring — consisting mostly of Russian emigres — staged dozens of fake car crashes to collect on insurance.
John Nordstrom of La Jolla, who was sentenced to 30 months in federal prison and required to pay $163,000 for his role in a scheme that bilked large numbers of California insurance customers. Nordstrom was a former owner of International Insurance Underwriters, which sold more than $100 million in insurance premiums during the late 1980s and early 1990s. According to court papers, some of the funds were diverted to his own personal use.
Dugo added that another reason for the rise in prosecution is that a variety of state agencies charged with investigating insurance fraud are cooperating more.
Three years ago, four state agencies — the Department of Insurance, Franchise Tax Board, Department of Industrial Relations and the Employment Development Department, or EDD — formed a special task force with the San Diego County District Attorney’ s Office specifically to attack workers compensation premium fraud, which involves false reports filed by companies when they buy insurance. It was the first task force of its kind in California.
After two years of investigations, the task force launched a wave of arrests in 1999. Last June, it obtained the largest set of indictments on premium fraud ever granted in California, accusing 21 individuals from eight companies of insurance fraud and tax evasion totaling $1.9 million. So far, six people have been convicted, with the rest awaiting trial.
The rise in premium fraud may have to do with the growing cost of workers compensation insurance. The insurance premiums are based on several factors, including the size of a company’ s payroll, the experience of its workers and the amount of danger involved in the job.
For a dangerous job, the insurance costs can be prohibitive. Roofers and tree trimmers, for instance, may require up to 40 percent of their payroll on insurance, so a company with a$1 million payroll ends up paying $400,000 on insurance.
Such heady price tags can entice companies to fudge their figures. San Diego construction company owner Dennis Russell was sentenced on charges that he and his daughter had defrauded insurers and tax authorities out of $668,000, resulting in the stiffest jail term ever meted out in California over insurance-premium fraud.
According to court filings, Russell, who heads Dennis Russell Construction and three smaller building firms, habitually underreported the amount of money he was spending on payroll for his workers. In the past decade, investigators say, he undercounted his payroll by more than $5 million.
Since payroll taxes and workers compensation premiums are based, in part, on the size of a company’ s payroll, the undercounting allowed Russell to avoid taxes and insurance costs. In addition, authorities say, Russell pocketed some of the money his employees were paying for their
workers compensation contributions and spent it on such things as his condominium and pool- cleaning service.
Russell’ s undercounting unraveled after he laid-off several of his workers. The out-of-work employees went to the EDD to file for unemployment claims, but the EDD told them they were not due any money since there was no record that they had ever worked for Russell.
When they complained, the EDD launched a probe that eventually pulled in investigators from the state tax authorities, District Attorney’ s Office and Russell’ s insurers, Golden Eagle and the State Compensation Insurance Fund.
The probe found that Russell had avoided as much as $90,000 in insurance bills as well as underpaying taxes by up to $410,000. In December, Russell was sentenced to six years in state prison.
Not all insurance fraud cases result in large restitution for the insurers. More typical is the case of
Simon Chang, who was arrested in August on suspicion of trying to bilk Wawanesa Insurance out of $476 by inflating his rental-car costs after his car was stolen. Chang says he was merely trying to compensate for Wawanesa’ s reluctance to pay the entire amount of his claim.
The insurance companies maintain that it’ s important to wipe out all fraud, no matter how small. The Coalition Against Insurance Fraud, or CAIF, estimates that fraud totals about $80 million each year, costing each family in America more than $900 per year through higher insurance fees as well as higher prices in the shopping mall, since consumers end up paying for the insurance costs of manufacturers, retailers and service providers.
Not everyone buys such arguments. Consumer watchdog groups say insurers exaggerate the cost of insurance fraud to justify price hikes on their premiums. They say CAIF’ s statistics — based on a complex series of calculations on data collected by insurers, police agencies and pollsters — are far too high.
“We don’ t deny that there’ s insurance fraud, which can and should be stopped,” says Doug Heller, a consumer advocate with The Foundation for Taxpayer and Consumer Rights in Santa Monica. “But fraud represents only a small percentage of claims. In general, it’ s perpetrated by fraud rings. The insurance industry uses these exceptional cases to inflate the perception of fraud and then inflate the premiums consumers pay.”
Heller says insurers also use the hype surrounding fraud cases to “deny, delay and lowball legitimate claims from honest customers. That’ s the way fraud damages consumers.”
But insurers say the fraud prosecutions — and the publicity given to high-profile cases — helps reduce the amount of overall fraud. CAIF contends that because of the rise in insurance prosecutions, the amount of fraud is actually dropping.
Between 1995 and 1997 — the latest date when comprehensive totals are available — the total amount of insurance fraud dropped an estimated 8 percent, according to CAIF. Dennis Jay, CAIF’s executive director, maintains that the increase of prosecution has helped reduce crime by removing some of the key players — such as crime rings that stage car collisions to collect insurance — and by drawing the public’ s attention to the penalties associated in fraud.
Jay, whose group is funded by the insurance industry, maintains that it’ s important to continue the vigil against fraud.
“The cost for insurance fraud is buried in every product and service we buy,” he says, adding that “as more and more people learn about the costs of fraud and make up their minds they won’t tolerate the hit on their pocketbooks, we will continue to see these numbers drop.”