Insurance and Government and Economic Development

Industry making push for creation of state fraud unit: Indiana one of only 10 states without insurance fraud agency, but funding issues could be major obstacle

August 8, 2005

Members of the insurance industry have begun a campaign to bolster the state's fight against fraud by targeting the creation of a bureau to help combat the crime.

Indiana is one of only 10 states without an agency addressing insurance fraud, according to the Washington, D.C.-based Coalition Against Insurance Fraud.

But the goal of the task force convened by Jim Atterholt, commissioner of the Indiana Department of Insurance, is to have a fraud bureau operating within his department sometime next year. Supporters plan to draft a bill that a sponsor can introduce during the next legislative session.

The push to launch a bureau is the second step to strengthening the state's antifraud measures. Lawmakers earlier this year passed House Enrolled Act 1403, which increases the penalty for insurance fraud from a misdemeanor to a Class D felony.

Moreover, Atterholt said the focus on fraud complements his plan to make Indiana more attractive to insurance companies looking to expand here.

"Our main objective is to create economic development opportunities in the insurance industry," he said. "This is not the end-all be-all, but it's certainly an important piece of the puzzle."

Atterholt said the fraud bureau's mission would be twofold: to assist county prosecutors in pursuing cases, and to serve as a data center for fraud activity in the state.

One of the hurdles, however, could be funding. Atterholt projected the bureau, with a staff of five, would operate on an annual budget of roughly $500,000. Because no state funds are available, the insurance industry most likely would foot the bill.

Carriers might pay a flat fee or an assessment on each premium. While insurers largely favor creating a fraud unit, they recognize funding could be an obstacle, said Tami Stanton, state affairs manager for the locally based National Association of Mutual Insurance Carriers trade group.

"We would not want more fees in Indiana, but we're trying to find a creative way to get this going without putting a tremendous burden on the insurance industry," said Stanton, a member of the task force. "We already pay enough."

Indiana insurers contribute $177 million in premium taxes, the majority of which flow into the state's General Fund, she argued.

The "minimal" amount companies might contribute would be worth the investment, Atterholt countered, given that insurance fraud costs companies and consumers plenty.

The Insurance Information Institute in New York City estimates the total cost of fraud nationwide to be $85 billion to $120 billion annually. The largest amount, roughly $29 billion, occurs within the property and casualty areas, according to the III.

Statistics are not available for individual states, but industry experts know the amount of insurance fraud in Indiana pales in comparison to such hotbeds as New York and New Jersey. They say most fraud occurring in Indiana is the "soft" type, in which a policyholder or claimant exaggerates a legitimate claim.

A common example cited by the III might include a motorist involved in a fender-bender who pads the claim to cover the policy deductible. Another common tactic is exaggerating the amount and value of items stolen from a home or business.

"Hard" fraud is a deliberate attempt to stage or invent an accident, injury, theft or arson in which the loss would be covered under an insurance policy.

Locally based Farm Bureau Insurance of Indiana knows fraud exists, said company spokeswoman Liz Reynolds. Executives there hope the bureau will help them better understand what they are dealing with and how best to address it, she said.

Most insurance companies have fraud units that investigate suspect claims. Andris Berzins heads the special investigation unit at the local office of Minnesotabased Federated Mutual Insurance Co. and is Indiana chapter president of the International Association of Special Investigation Units in Baltimore.

The legislation that increased the penalty for insurance fraud in Indiana, combined with the possibility of creating a fraud bureau, might lead to more prosecutions, Berzins said. County prosecutors in Indiana historically have been hesitant to take fraud cases, due to weak penalties and a lack of resources.

"The state has not focused on the insurance-fraud problem," Berzins said. "We need the help of the state and the prosecutors to help fight the problem."

While states such as Indiana are trying to crack down on insurance fraud, con- vincing the general public the actions are indeed a crime may be more difficult. According to a 2003 survey by consulting firm Accenture Ltd., nearly one in four Americans thinks it is OK to defraud insurers by overstating claims.

Atterholt, meanwhile, is confident his department will boast a fraud bureau soon.

"I think if the industry unites, and we find the appropriate funding mechanism," he said, "I believe legislators will respond very, very favorably to this idea."

In 1945, North Carolina became the first state to create a fraud unit, said Howard Goldblatt, director of government affairs for the CAIF. Most states that have bureaus established them within the past 15 years, he said, as it became more apparent they needed a tool to investigate the crime.
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