WASHINGTON — The sour economy is producing a bumper crop of cash-strapped consumers, business owners and shady agents who're fueling a wave of insurance fraud that's keeping regulators and law enforcement officials busy from coast to coast.
Whether it's worthless health plans peddled by fax, staged auto accidents, arson or slip-and-fall accidents at the local mall, insurance fraud of all kinds is booming in the recession and consumers are paying the price in higher premiums.
To keep it in perspective, roughly 48 million insurance claims are made each year in the U.S. and less than one-quarter of 1 percent are referred to the nonprofit National Insurance Crime Bureau for investigation of possible fraud.
Last year, that amounted to just more than 85,000 questionable claims. That was up 14 percent from nearly 75,000 in 2008, however.
A recent survey of 37 state insurance-fraud bureaus by the Coalition Against Insurance Fraud found that the recession "appears to have had a significant impact on the incidence of fraud" last year. On average, the bureaus reported increases in case referrals and new investigations in all 15 categories of fraud the survey covers.
Leading the way was the sale of bogus health insurance plans, with 38 percent of bureaus reporting a "much higher" increase over 2008.
With some 50 million uninsured Americans and growing confusion about the health care debate, state insurance regulators have their hands full keeping up with scam artists. In recent months, more than dozen states have put out consumer alerts or issued fines and cease-and-desist orders against unregistered firms offering worthless plans or deceptively marketing plans with limited benefits as full-coverage insurance.
Some of the bogus plans turn out to be discount cards that provide only slight price breaks on services such as prescriptions or X-rays. Many are advertised on television and the Internet, but most are marketed through junk faxes that are sent to businesses, government offices and homes.
One recent fax reads "Congress to pass reform act. In preparation for the new health care model, our company now offers creditable coverage plans" with 80 percent coverage on prescriptions, diagnostic, X-ray and lab work for only $368 a month, or $4,416 a year for a family policy.
Not a bad deal, considering the average annual price for standard family coverage exceeds $13,000, according to the Kaiser Family Foundation. For those who are jobless, uninsured and unable to afford COBRA health coverage, these offers seem too good pass up.
"So here you have people in desperate circumstances, and they're getting these faxes that are promising them the moon and complete coverage at low costs and they want to believe, so they buy it. But it's just a scam. It's a total scam. It's just a maddening, frustrating, unfortunate circumstance," Oklahoma Insurance Commissioner Kim Holland said.
Last August, the state of New York fined the American Medical and Life Insurance Co. $700,000 and barred it from selling limited-benefit plans in New York after numerous complaints from consumers.
In one instance, a Rochester woman bought an American Medical plan, paying $419 a month in premiums. When her hospital bills totaled nearly $28,000, the policy paid only $1,164 of her bill, state officials said. A 36-year-old man who suffered a stroke had a similar experience when his plan paid only $250 toward his $30,000-plus hospital bill, state officials said. The company eventually paid in full after the state insurance department got involved.
John Ollis, the president of the American Medical and Life Insurance Co., said independent agents who sold the policies didn't properly explain their benefits. Ollis said the company agreed with state officials that the policyholders wouldn't have bought the plans if they'd known of the coverage limitations.
State officials are reviewing a company proposal to retrain its agents and to comply with other state rules. If it's approved, the company can resume sales of limited-benefit plans in New York, Ollis said.
Oklahoma is one of 20 states that have taken action or are moving to stop one of the biggest national providers of these policies, a company known as the American Trade Association. Headquartered in Tennessee, ATA has taken in about $14 million in premiums across the country from about 12,000 people, Holland said.
Typically, policyholders don't realize they have worthless or inadequate coverage until they submit claims. The company does business in numerous states under a variety of monikers, including Serve America Assurance and Smart Data Solutions.
"They change their name and face when regulators get close," Holland said.
Recently, ATA sued two South Carolina companies in federal court in Tennessee, claiming the firms were to blame for failing to secure insurance for ATA members.
An ATA attorney in Memphis, Tenn., declined to comment.
Frank Scafidi, a spokesman for the National Insurance Crime Bureau, said there were no empirical data to validate the theory that the economy was spurring more insurance fraud.
He said, however, that when gasoline prices began to spike several years ago, so did the number of automobile "give-ups," in which owners fraudulently report their vehicles as stolen or destroyed in order to collect on the insurance. Many of the abandoned vehicles were gas-guzzling SUVs and pickup trucks, Scafidi said.
In the absence of more hard data, however, the survey of state insurance-fraud bureaus is notable. As the recession raged last year, 68 percent of states surveyed by the Coalition Against Insurance Fraud also reported an increase in auto "give-ups" as job losses made it hard for many people to keep up with their payments.
Some owners put their vehicles into lakes or rivers and report them stolen. Others may be less creative.
When creditors came looking for Elizabeth Layton's tractor in January, she allegedly claimed that it was stolen. However, information in an unrelated burglary investigation revealed that the vehicle was in a garage on a nearby farm. Layton, of Laurens, N.Y., faces charges of grand theft, insurance fraud and false reporting.
Insurance agents appear to be a big part of the fraud problem, with 69 percent of states citing an increase in agent fraud.
Former insurance agent Emil Feduniec, 52, of Tuckahoe, N.Y., was arrested in February, accused of failing to make payments on two policies while collecting more than $15,000 in commercial property insurance premiums in 2008 and 2009. The two policies ended up being canceled for nonpayment, but not before one of the property owners paid $25,000 for roof damages to a structure that Feduniec allegedly failed to insure. If he's convicted on grand larceny charges, Feduniec faces up to seven years in prison.
Roofers were some of the worst insurance scammers last year.
According to the insurance crime bureau, the number of questionable claims for hail damage spiked more than 200 percent, from 256 in 2008 to 772 last year.
Roofers, like other general contractors, suffered through a dismal 2009 as homeowners, unwilling to tap their depleted equity, put off repairs.
"We have seen more questionable claims in the area of hail damage where unscrupulous roofing companies take advantage of storms to fake or deliberately cause damage to roofs," said Joe Wehrle, the president of the insurance crime bureau.
Scott Morrison, an expert in hail roof damage with Haag Engineering of Dallas, said homeowners were more likely to be the culprits. They try to simulate hail damage by striking the roofs with ball-peen hammers or golf balls inside socks or even by twisting quarters into asphalt shingles.
The scams often unravel when cotton and nylon fibers from the socks are left in the shingles. Morrison said that striations left in the tiles from quarters or dimes also were visible.
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