The white lies that could cost you dearly
Bump up an insurance claim, deliberately cause some ‘accidental damage’ or be a little creative on an insurance application form and you could find yourself with a criminal record, out of pocket and barred from buying insurance or credit products.
“Insurance fraud has become acceptable, but it’s a crime under the Fraud Act,” warns John Beadle, counter-fraud manager at RSA Insurance and chairman of the Insurance Fraud Bureau. “It’s also thought to be victimless but it affects every insurance policyholder.”
The extent to which it’s become OK to rip off insurers can be seen in research carried out by the industry.
According to the Association of British Insurers, one in 10 adults is happy to admit to having made a fraudulent claim. Price comparison service Gocompare.com found that two-thirds of parents would insure their child’s car in their name, a fraudulent practice known as ‘fronting’, in order to save money on premiums.
Acceptance of insurance fraud is costing the industry dearly. According to the Insurance Fraud Bureau, bogus and inflated claims account for more than £1.6 billion a year.
“Around 5% of claims are fraudulent, with 80% of these claims opportunistic fraud such as exaggerating the loss or creating additional accidental damage,” says Richard Davies, fraud risk manager at AXA and a board member of the IFB. “But this activity puts an extra £40 on every insurance policy each year. So, if you have four or five policies, this will be an extra £160 or £200 a year you’ll pay for cover.”
Credit crunch affect
Economic conditions mean the practice is becoming more common. “The credit crunch is making more people consider insurance fraud to help them make ends meet,” says Emma Griffiths, case manager for Absolute Fraud Management. “We analyse our data every quarter and there was a 13.8% increase between quarter one and quarter two of this year.”
Given the scale of the problem, it’s not surprising the insurers are taking a hard line on fraud. New methods of fraud detection are being introduced and this has led to a sharp increase in the amount of fraud uncovered. For example, in 2003 insurers detected fraud worth more than £200 million; by 2007 this figure had risen to £577 million.
With the insurers intent on stamping out fraud, many are now taking a zero tolerance approach when they catch someone committing fraud. “Insurers used to be happy to just not pay the fraudulent claim but we’re now seeing many more cases subject to more harsh penalties, including being referred to the police,” says Davies.
Although the insurers will take into account whether it was deliberate or not, there are a number of things that fall under the fraud banner, some of which are obvious, others possibly less so.
Exaggerating a claim is the most common form of opportunistic fraud, with many people happy to add a few more DVDs to a home insurance claim or upgrade their Seiko watch to a Rolex on a travel insurance policy.
While it may be an amusing myth that more Rolex watches appear in insurance claims than have ever been made, get caught fibbing about your loss and you won’t be laughing.
Andrew Buck, claims fraud manager at Norwich Union, explains: “You might have had a genuine loss but if we’re able to establish that any part of the claim is fraudulent we would turn the claim down and you wouldn’t receive a penny.”
The exaggeration need only be minor too. As an example, Buck says a policyholder had a household break-in and most of their electrical items and DVDs were stolen. “The claim included DVDs that hadn’t even been released in the UK when the break-in occurred,” he says. “So, we turned the whole claim down.”
Fronting, where you take out motor insurance as the main driver on someone else’s behalf to reduce the premium, is another relatively common practice. The classic example is when a recently qualified driver attempts to get insurance but, faced with a four-figure premium, asks a parent to take out the cover for them at a much lower premium.
“Insurers take varying views on this,” says Emma Griffiths. “Some will decline the claim or cancel the policy. Others will pay the claim but you’ll be charged the premium you should have paid if the car was insured with the main driver’s details.”
Another common fraudulent claim for motor insurance involves an accident victim claiming for older damage. Buck says: “This can be very easy to spot. We’ll instruct engineers to check out the vehicle and they’ll be able to assess exactly what damage could have been caused by the accident.” Get caught doing this, and you’re likely to have the claim turned down and possibly have your policy cancelled.
Mocking up accidental damage is another form of fraud the insurers spot more often than they’d like. “It’s amazing how many people spill paint and it ends up all over the carpet, throughout the house as well as on the sofa,” says Baden Smith, head of assurance services at Legal & General.
He says these types of fraudulent claims can be easy to spot. “Spilt paint behaves in a particular way and this isn’t easy to replicate intentionally,” he adds.
In claims where there is some doubt, Smith will call in the forensic scientists. “They’ll look at the evidence and where necessary will try to recreate the situation, sometimes as many as 20 times, to see whether it’s possible,” he explains.
The human cost of lying
While the repercussions for lying on your motor insurance application form or pushing up the value of a damaged TV when claiming on your contents insurance could be severe, they are nothing compared with the consequences you could face if you were to make a false claim on a life policy.
A prime example is what happened to John and Anne Darwin after they staged his death to claim on his life policy. John disappeared while canoeing in the sea in 2002. Although his body was never found, his wife successfully claimed £250,000 in life assurance and pensions.
But, in December 2007, John walked into a police station claiming to have lost his memory. Evidence of the deceit included a photograph of the couple, taken in Panama in 2006. The couple were charged with obtaining cash by deception and, in July 2008, John was sentenced to six years and three months in prison. His wife received a sentence of six-and-a-half years.
Although fraud is not a major concern when it comes to life cover, critical illness insurance and income protection cover there will always be a devious minority who seek to mislead insurers. There is also a high level of non-fraudulent but nonetheless misleading non-disclosure where applicants reduce their weight and alcohol intake, thinking it won’t matter. While these types of non-disclosure might not be deemed fraudulent, the insurer may still only pay part of your claim.
To make sure your policy will pay out, it’s important to disclose as much as possible on your application form, says Alan Lakey, principal of IFA firm Highclere Financial Services. “Clients need to be aware that purposeful non-disclosure is likely to result in a waste of their money and disappointment for their families. Advisers can help by explaining non-disclosure and picking up on areas such as smokers suggesting that they are non-smokers.”
How the insurer will penalise you when these omissions come to light varies. If it would only have a small effect they might simply ask you to pay the difference in premiums, but there’s always the risk they’ll take firmer action.
Beadle says: “There is an obligation on you in the Insurance Act to be honest. If you think you’ve not told us something that would make a material difference to your policy, do tell us. It’s better to do this before you need to use the policy as we may be able to amend your cover.”
As well as potentially having your claim declined and the policy voided, insurers will also take other steps that can be potentially more damaging than having a claim turned down.
“We have a zero tolerance policy on fraud,” says Smith. “We do look at each claim individually but we might also involve the police, share your details with other insurers so they know you might commit insurance fraud and enter your details on the fraud prevention database, CIFAS. This would make it much more difficult to get insurance and other financial services products.”
The police force is also taking insurance fraud more seriously. The National Fraud Reporting Centre is being set up, which will include details of insurance fraud to help the police to identify cases of serial fraud.
But while their anti-fraud strategies may make it seem as if the insurers are suspicious of your every move and may interpret even honest mistakes as criminal activity, they’re all keen to stress this isn’t the case.
“If you’re honest, you should feel confident that if you have a loss your insurer will pay the claim,” says Buck. “Fraud isn’t worth it. You could lose your policy and find yourself subject to police action.”
Organised insurance fraud
While opportunistic crime makes up the bulk of insurance fraud, organised crime is also a major concern for the insurance industry. Estimates suggest that insurance fraud earns criminal gangs as much as £4 million a week.
Staged accidents, also known as ‘crash for cash’, are a particular concern for the industry.
“The criminals target innocent motorists, driving into their cars or causing the unsuspecting motorist to crash into them. They’ll then claim for injury, loss of earnings and so on and by adding extra people to the car, the claim can easily be for £30,000 or more,” explains Richard Davies, fraud risk manager at AXA.
Because of the risk to innocent people as well as the amount of money involved, the Insurance Fraud Bureau has focused its investigations on this area with significant success. So far there have been more than 200 arrests relating to this activity, with some of the convicted fraudsters receiving prison sentences as long as three-and-a-half years.
How the insurers will catch you
Insurance companies are getting tougher on fraud and have introduced tools to increase detection rates and stamp out this problem.
On the frontline, trained claims handlers can spot potentially fraudulent claims. “When a policyholder phones in, the claims handler will listen to detect all sorts of behavioural issues as well as inconsistencies in the story,” says Baden Smith, head of assurance services at Legal & General. As an example, if a policyholder is aggressive in this initial call it could indicate that they are trying to hide something.
Insurers also use computer programmes such as voice stress analysis and predictive analytics to identify possible cases of fraud.
Where claims do arouse suspicion, they will be referred to fraud specialists, who further investigate the case, checking other details about the policyholder and bringing in other specialists where necessary.
Insurers are sharing information more too. Through databases such as CIFAS, an insurer can check a policyholder’s details to find out whether they have a history of fraud.
The insurance industry is also encouraging people to report fraudsters. The Insurance Fraud Bureau runs Cheatline, a confidential helpline if you have any information on suspected insurance fraud. The number is 0800 328 2550.
How did they think they’d get away with it?
Insurance fraud takes many forms, ranging from the cheeky to the downright criminal. Here are a few examples of real life cases:
1. A policyholder submitted a claim for a new 42-inch LCD television saying they had dropped theirs while decorating and it had cracked. The insurer arranged for a specialist to assess the damage but the policyholder said they had already thrown it away. They were also unwilling to supply details of where they had bought it.
The insurer investigated further and discovered that, although the policyholder said he had bought the television in November 2006, it didn’t appear on the market until April 2007. The claim was subsequently declined and the policy cancelled.
2. A policyholder reported a claim for a paint spillage to a sofa and carpet in July 2007. He said he was up a stepladder painting a window frame when someone came to door, causing the paint pot to fall off the ladder, onto the sofa and the carpet. The insurer contacted forensic investigators Hawkins to examine the claim.
Hawkins concluded that it wasn’t possible to recreate the situation because the paint would have behaved differently, creating a pool of paint, which was not evident in the claim.
The claim was rejected and the policy cancelled. Details were also filed with CIFAS, the insurance industry’s fraud database.
3. A house fire completely destroyed a policyholder’s home and they lodged a claim for £250,000. This was honoured by the insurer and the house was rebuilt.
But, a subsequent invoice for £25,000 for landscaping of the garden aroused suspicions because it was significantly larger than had been expected. An investigation revealed the claim was fraudulent. As a result, the whole claim was rejected, the policy voided and the policyholder sued for the cost of rebuilding the house.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.