weekend post, Are insurance industry fraud statistics deceptive? resulted in several nice comments. One was from Rutgers insurance law professor Jay Feinman, who wrote the book, Delay Deny Defend – Why Insurance Companies Don’t Pay Claims and What You Can Do About It. His book should be in everyone’s personal library.
Feinman’s commentary noted:
Good post. The industry sources behind the study decided not to do real empirical research and predictably came to familiar conclusions. A big question when calculating insurance fraud is how the amount is calculated. A leading article focusing on fraud in the UK raises a major problem even if the reported figures have some empirical basis: If a $100,000 claim is filled at 5%, the industry reports this as a $100,000 fraud or – correctly – as a $5,000 scam. My bet is the former. See James Davey, A smart(er) approach to insurance fraudhere: https://cilj.law.uconn.edu/.
I encourage them to read Davey’s article, which was linked by Feinman.
Jay Feinman also wrote an article on insurance fraud that is worth studying, Insurance Fraud, Agency, and Opportunism: False Profanity in Insurance Claims. It was part of his discussion that made me think of Doug Quinn and the American Policyholders Association, whose mission is to undercover insurance fraud against policyholders:
[T]the insurer as well as the insured have agency and have incentives to act opportunistically. When a claim occurs, the insured usually lacks effective means to monitor the company’s performance in handling the claim, and the policy terms and surrounding law that measure the company’s performance are vague and difficult to enforce. In addition, it is in the company’s interest not to pay a claim or to pay as little as possible. The company that completely or partially denies payment of a claim increases its profit. The company that only delays the payment of a claim increases its return on capital and thereby increases its profit. Market competition, reputational effects, and administrative regulation do not provide effective checks on opportunistic behavior.
The false profanity doctrine aims to address the insured’s opportunism. One might consider the problem of insurer opportunism to be entirely separate so that it is irrelevant to the false profanity doctrine and should be addressed by entirely separate doctrines and remedies. But in fact the two problems are connected. One possible form of insurer opportunism is the allegation of fraud by the insured as a reason for not paying a claim. The doctrine that enforces and evaluates that reason becomes a tool of opportunism, and the serious consequences of a finding of false profanity raise the stakes considerably. Therefore, when it comes to false profanity in the claims process, there is agency and opportunism on both sides.
Each of the reasons for the false profanity doctrine also relates to the opportunism of insurance companies. Opportunism on the part of insurers constitutes a serious breach of the contract of insurance, not only its express terms requiring payment of what is owed but also the duty of good faith. Insurer opportunism imposes ineffective monitoring costs on insureds, costs that many insureds cannot bear at all. It violates moral and legal restrictions. And insurance fraud comes at a cost to pool members whose claims go unpaid, just as preventing that type of fraud benefits the entire pool by making the claims process work better for all claimants.
I wonder if the insurance industry calculated the amount of fraud it was committing on its own policyholders when they made up their new statistical number? If not, Barry Zalma may be right – the amount of fraud claimed by the insurance industry may be far too low.
One of the things that I noticed in my private practice was the fact that so many people had been scammed and would come into my office, whether it was a scam, whether it was some weird business taking advantage of them. So when I went to the General Assembly, I started working on laws that helped protect the consumer.