INSURANCE FRAUD IN WISCONSIN: A PROPOSAL TO THE STATE
INSURANCE FRAUD IN WISCONSIN:
A RECOMMENDATION TO THE STATE
A Seminar Paper
The Graduate Faculty
University of Wisconsin – Platteville
In Partial Fulfillment
Of the Requirement for the Degree
Master of Science in Criminal Justice
Nancy Lynn Schneider
FRAUD IN WISCONSIN: A RECOMMENDATION TO THE STATE
Nancy Lynn Schneider
Under the Supervision of Dr. Susan Hilal
Statement of the Problem
Unlike most states in America that have some type of centralized antifraud
effort in place as a result of various legislative efforts, Wisconsin has no cohesive
system in place for the detection and prosecution of insurance fraud. As a result,
insurance fraud in Wisconsin is not tracked, measured, or monitored. States that
have synthesized antifraud efforts are better equipped to fight insurance fraud.
Programs in those states integrate legislative duties and rights that are enforced
through state fraud bureaus and oftentimes by the state insurance commissioner.
Complicating the underlying problem is both consumer acceptance and ignorance
of fraud. Until Wisconsin has a fraud bureau, the extent of the insurance crime
problem will remain unknown and all consumers will continue to pay for the
expenses fraud causes through higher premiums.
Methods and Procedures
Secondary research from a variety of studies will form the basis of the
methodology. Evidence from studies in other states that have fraud bureaus will
be analyzed to support the argument that by developing a systematic approach to
fraud prosecution in Wisconsin a benefit will be derived by the insurance industry
and consumers. A theoretical framework for causation of insurance crime and its
deterrence is offered to bolster the argument for fraud prosecution. Social
learning encompasses a rational choice perspective and routine activities theory to
explain insurance crime and bolster deterrence theory in support of establishing a
crime bureau in Wisconsin.
Summary of Results
State insurance crime bureaus are a necessary antifraud tool. Multiple
sources in the insurance industry and law enforcement organizations dedicated to
antifraud efforts attest to the necessity of joint antifraud efforts. A bureau
synthesizes these efforts. Cooperative efforts among private and public sectors in
the fight against insurance fraud are evidenced by several fraud bureaus.
In Wisconsin, no measure of fraud of any type in any line of insurance is
available. Analysis of crime and arrest reports in Wisconsin does not shed light
on the problem of insurance fraud. Due to the lack of measurement and
monitoring in Wisconsin, more research is necessary to establish best practices in
the insurance industry in Wisconsin. Research in the area of insurance fraud in
the State of Wisconsin should be twofold: to investigate the level of fraud
perpetrated on the insurance industry, and to determine its cost to consumers in
the state by analyzing the rising cost of insurance premiums. Additionally,
research of this nature would allow for better documentation of the problem as
well as efforts to fight it. No such research exists.
TABLE OF CONTENTS
TABLE OF CONTENTS……………………………………………..……iv
Statement of the Problem………………………………………….1
Purpose of the Study………………………………………………4
Significance of Problem…………………………………………...5
Methods of Approach and Limitations……………………………7
Scope of Problem……………………………………………...…10
Escalating Insurance Fraud in a Weakened Economy…........14
Consumer Attitudes toward Fraud……………………………….23
III. THEORETICAL FRAMEWORK AND
Social Learning Theory……………………………………….….35
Rational Choice Perspective.………………………………...37
Routine Activities Theory.…………………………………..39
IV. SUMMARY, CONCLUSIONS AND
SECTION 1: INTRODUCTION
Insurance Fraud in Wisconsin: a Recommendation to the State
Statement of the Problem
Insurance fraud is a major problem across the United States: The
Coalition Against Insurance Fraud (n.d.) estimates that fraud costs this country
approximately $80 billion annually and is America’s hidden but most damaging
crime wave. When considering all lines of insurance sold in America, the total
tab for fraud could be as high as $120 billion (National Insurance Crime Bureau,
2008). This figure includes, but is not limited to, property and casualty fraud,
worker compensation fraud, corporate and individual health insurance fraud, and
life insurance fraud. Even utilizing the lower figure of $80 billion, recuperation
of that amount could cover the costs of tuition for 15.6 million university students
for one year, or salaries of 2.2 million workers in America for one year (Coalition
Against Insurance Fraud, n.d.).
The Insurance Information Institute (2009) provides information relative
to the state laws for each state that identify insurance fraud. In addition to
providing the statutes for each state formulated to combat fraud, the Institute also
provides information as to whether fraud is defined generally or to specific areas;
whether immunity statutes are in place for reporting fraud; whether the state has a
fraud bureau, and, if so, whether it is located within another agency or stand
alone; whether a mandatory insurer fraud plan is in place; and whether the state
has mandatory auto policy photo inspections prior to the issuance of an auto
policy (see Appendix A for a comparison of the key state laws on insurance fraud
in each state). States that have the greatest protections include Arkansas,
California, Colorado, District of Columbia, Florida, Kansas, Kentucky, Maryland,
Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New
York, Ohio, Pennsylvania, Rhode Island, Texas, and Washington. Five states
offer limited immunity for reporting fraud: Alabama, Hawaii, Mississippi, Rhode
Island, and Wyoming. States with the least antifraud legislation, including the
lack of a fraud bureau, are Alabama, Illinois (although a bureau for worker
compensation fraud recently opened), Indiana, Maine, Michigan (although new
legislation is pending), Oregon, Tennessee, Vermont, Wisconsin and Wyoming.
Although the Institute identifies Wisconsin as having an insurance fraud
bureau located within its Department of Justice, no such bureau exists. Located
within the Department of Justice, however, is the Medicaid Fraud Control Unit
(MFCU) whose purpose is to investigate and prosecute allegations of fraud (by
providers) and abuse (of patients) in facilities receiving Medicaid funding. The
MFCU is supported by approximately 75% of federal funds and is required to be
certified annually by the United States Department of Health and Human
Services' Office of Inspector General.
The Division of Criminal Investigation (DCI) within the Wisconsin
Department of Justice is charged with investigating crimes that are statewide in
nature or importance. Agents from this investigative division will assist local law
enforcement agencies in multi-jurisdictional fraud cases. Whether any insurance
fraud has ever been investigated by DCI is not known because this information is
not tracked. Primarily, this division of the Department of Justice is involved with
the investigation and prosecution of arson, financial crimes, illegal gaming,
internet crimes, drug trafficking, government corruption, and crimes against
children (Wisconsin Department of Justice, n.d.).
According to the Wisconsin Office of the Commissioner of Insurance, it
does not have the authority to investigate consumer fraud against insurers and
does not accept reports of consumer fraud from the National Association of
Insurance Commissioners' On-Line Fraud Reporting System (OFRS), the
mechanism for reporting to Commissioners in states where reporting is mandatory
or permissible. While federal and state laws have developed to enhance antifraud
efforts, without a cohesive plan to enforce them in Wisconsin, little can be done.
It falls to the insurance companies themselves to identify fraudulent claims,
investigate them, and report them to law enforcement unless the crime is
discovered first by the police (i.e., filing false police reports of theft, vandalism,
etc.). Research conducted recently on the level of insurance fraud prosecution in
Wisconsin revealed that of the twenty-one fraud cases that were charged in 2005,
only fourteen of them were prosecuted (Taarud, 2006).
Compounding the problem is some consumers’ beliefs that bilking the
insurance companies is acceptable. Ironically, the very insurance consumers who
believe it is it permissible to rob insurance companies end up paying for their own
thievery in the long run. While they believe they are merely taking what they
believe to be rightfully theirs because they have paid premiums, in effect, they are
taking from everyone including themselves.
Purpose of the Study
The purpose of this research is (1) to investigate insurance fraud, (2)
define the need for a centralized antifraud effort in Wisconsin, (3) analyze other
states’ efforts to combat fraud, (4) and make a proposal for an antifraud program
in Wisconsin with recommendations for continued research, measurement and
monitoring of fraud. For purposes of clarity, this research excludes extensive
discussion of Medicare and Medicaid fraud because it is heavily investigated,
prosecuted, measured and monitored at the federal level.
Research in the area of insurance fraud in the State of Wisconsin should
be twofold: to investigate the level of fraud perpetrated on the insurance industry,
and to determine its cost to consumers in the state by analyzing the rising cost of
insurance premiums. Additionally, research of this nature would allow for better
documentation of the problem as well as efforts to fight it. No such research
exists. Without a centralized effort such as an insurance fraud bureau that tracks
insurance fraud and the efforts to combat it, the impact on state consumers cannot
be measured. Fraud in Wisconsin will remain a hidden crime.
This research therefore looks at information from other states that attempt
to analyze the scope of the insurance fraud problem and how antifraud efforts are
instituted to combat the problem. Current measures of fraud and efforts to fight it
differ across lines of insurance, among insurance companies, and across the states.
Modeling crime bureaus from “successful” fraud fighting states will allow
Wisconsin to address its own fraud problem, measure it, deflect it, and measure
antifraud outcomes. An increasingly successful fight against fraud in this state
could alleviate the rising cost of insurance premiums to consumers and potentially
boost Wisconsin’s economy in the long run.
Significance of the Problem
Fraud accounts for 10 percent of claims and losses paid per year (Dean,
2004). The insurance industry is an ideal target to commit fraud against. It has to
balance its efforts to do good faith business against its policyholders who do not
do good faith business and commit fraud. In Wisconsin, there can be little
balance because insurance companies are wary of bad faith litigation. The
National Association of Insurance Commissioners (NAIC) (2009) reports the
direct premiums earned in 2008 by the top 25 companies in the United States
doing property and casualty business was more than $496 billion. The reported
direct loss ratio for this sector of the industry was 70.54 percent. If ten percent of
the loss ratio was for fraud, this translates into a loss of approximately $35 billion.
In Wisconsin, Dilweg (2007) reported insurers had net earned premiums
in 2007 of more than $20 billion, or roughly four percent of the nation’s earned
premiums. Assuming the industry loss ratio remains relatively steady over the
years, the representative figure presented by NAIC when applied to Wisconsin
represents losses in an amount in excess of $14 billion. If ten percent of all
claims paid are fraud, Wisconsin insurance companies are losing roughly $1.4
billion to fraud. That loss is passed on to insurance policyholders through higher
Not only is fraud and efforts to fight it a problem, scholarly research and
program measurement/analysis is likely impeded by the inability to quantify what
fraud in the insurance industry entails. Auto insurance injury claims alone in this
country have seen an increase between 11 and 15 percent since 2002 and these
excess payments are estimated to be as high as 5.8 billion dollars (Insurance
Research Council, 2008). The portion of the $5.8 billion in excess payments paid
by Wisconsin is not known. Without cooperation among private and public
sectors in Wisconsin, the fraud problem in the state will remain hidden. As a
result, consumers will remain unaware of the impact fraud has on their
pocketbooks. Not only are premiums higher, but the daily costs of living increase
as a result of fraud as discussed later.
Insurance fraud has long reaching effects. This effect on Wisconsin’s
consumers is not known because research in this area is lacking. States that have
a centralized antifraud effort collect data that can be utilized for empirical studies
of those effects. Through a centralized effort in Wisconsin, antifraud efforts will
have a greater chance for research and measurement of fraud’s impact on
consumers. More importantly, by reducing the amounts paid out on fraudulent
claims it is assumed that the end result will be lowered premiums for consumers
and a reduction in the cost of goods of services for consumers due to lowered
premiums for the cost of business.
The Coalition Against Insurance Fraud (2001) found that of the 31 fraud
bureaus that provided restitution data to its quantitative analysis of state bureaus
during the years 1995 through 2000, $289 million was court-ordered in 2005
alone. The value of restitution dollars supports the argument that by developing a
systematic approach to fraud prosecution in Wisconsin, a benefit will be derived
by the insurance industry and its consumers. Money stolen through fraudulent
claims is returned to the economy by virtue of restitution dollars.
From a theoretical perspective, social learning theories involving rational
choice and routine activities support the argument that dishonesty resulting in the
filing of fraudulent claims or other insurance policy-related misrepresentations is
learned like any other behavior. The reconceptualization of deterrence theory
offered by some researchers buttresses social learning theory and supports the
argument that prosecution of fraud will deter it both generally and specifically.
Because fraud is formed through differential association (i.e., learned), deterrence
can be learned as well.
Methods of Approach and Limitations
Secondary data provided by state insurance fraud bureaus will form the
basis of the methodology. Claims prosecuted in those states or pursued in civil
court evidence the amount of restitution dollars paid by fraudsters. The formation
of a similar bureau in Wisconsin will represent a centralized and synthesized
process for the detection, investigation, and prosecution of fraud across all lines of
insurance. With the bureau having access to state claim history from all insurance
companies, a mechanism for measurement and monitoring of fraud in Wisconsin
would be created.
Wisconsin’s bureau will be created from an ideal approach that
encompasses all aspects of the fraud problem and utilizes what professionals in
the industry have outlined in the literature as best practices. The following
chapters will therefore cover the literature review, an analysis of the two major
fraud bureau studies, the theoretical framework and analysis that supports
measuring, monitoring and prosecuting fraud in Wisconsin, and a summary with
Limitations of this approach include the fact that the data under review
derives from bureaus that were not created equally nor do they function equally.
State fraud bureaus were created by different forms of legislation because each
bureau that exists is governed by its own state’s statutes. A critical light needs to
be focused on comparisons of bureaus.
SECTION II: LITERATURE REVIEW
The literature on insurance fraud is generally encapsulated within research
and findings related to white collar crime (Kane & Wall, 2005). The definition of
white collar crime generally involves crimes committed by offenders in the
context of their employment. Insurance fraud cannot be narrowly construed as a
white collar crime because the spectrum of people who commit fraud is so wide.
More so than not, insurance fraud is a crime that has little bearing upon one’s
employment, although it can involve crimes by people whose employment is
related to the insurance industry (i.e., agents and adjusters). As noted by Idaho’s
Department of Insurance (n.d.), insurance fraud is a crime perpetrated by a broad
spectrum of individuals. There are career criminals that defraud insurance
companies to earn their living, policyholders that believe they can recover their
deductible by exaggerating claims, as well as white collar individuals (corrupt
attorneys, medical providers, body shop owners, etc.) who participate in
organized crime rings.
According to Dean (2004), “literature on insurance fraud has appeared
almost exclusively in the insurance trade press, and it has focused on the detection
of fraudulent claims” (p. 68). Arguably, research has extended to consumer
attitudes toward fraud, moral hazard, and theoretical perspectives on fraud, among
others. No matter what the focus of the study, however, the literature does not
share a common definition of fraud. While defining fraud is difficult, without a
consistent definition in the literature, the cost and impact of fraud cannot be
measured, especially in Wisconsin where there is no clearinghouse of data to
The literature review here is divided into six parts. The first section looks at
the scope of the insurance fraud problem. The second part provides a definition
of fraud. The third part discusses the history of insurance and fraud. Part four
reviews the literature on consumer attitudes toward fraud. The fifth part discusses
the various programs in states with a fraud bureau. Finally, the sixth section
discusses prosecution of insurance fraud generally.
Scope of the Problem
Tennyson (2008) argues much fraud is never detected and therefore the
true extent of it is not known. A review of empirical evidence reveals substantial
discretion in the ways consumers file fraudulent claims, resulting in complicated
differentiation from legitimate claims. Defining what insurance fraud looks like
is part of the problem in detecting it, investigating it, and proving it. Prosecuting
it is another major difficulty especially for states, like Wisconsin, that do not have
a mandatory fraud plan. “Antifraud efforts across insurers are not uniform” (Hoyt
et al, 2006, Section D, para 5), but best practices are available.
In a seven-month investigation by Florida reporters on automobile
insurance, Schutte and Bergal (2001) reviewed 500 closed cases in the State
Department of Insurance and compared them against Department of Highway
Safety & Motor Vehicles driving histories and accident reports. An example of
the serious extent of insurance fraud was the discovery by the investigators that
one family-based criminal ring took part in 68 separate suspicious crashes. A
total of 139 crashes were caused by just eight individuals in one Florida county.
In another discovery, a single male perpetrator was found to have been integral in
36 crashes by using six aliases.
Another study that reviewed data from 1996 to 2001 found that suspicious
auto accidents in New York escalated by 848 percent (Papa & Basile, 2001).
New York had 400 cases of suspected no-fault insurance fraud in 1991. This
specific type of fraud climbed to 9991 cases by 1999 (Papa & Basile, 2001).
Hoyt, Mustard and Powell (2006) found that regardless of the rapidly
increasing state antifraud legislation in a 12 year period from 1988 to 1999, no
scholarly research has assessed the effectiveness of the legislative efforts to
reduce insurance fraud. The authors therefore sought to measure the impact of
reform on the level of automobile insurance fraud (Hoyt et al., 2006). The
problem with the assessment is that it measures only part of the overall problem in
that the study only investigated Personal Injury Protection (PIP) coverage.
Nonetheless, Hoyt, et al. found that PIP coverage provides almost systematic
opportunity for fraud because there is a six month window in many states within
which the claim can be filed after the accident and the claim must then be paid
within 30 days. To deny the claim on fraud, fraud must be proved up at the time
of denial. Any evidence of subjective injury is lost in the initial six month
The Wisconsin Office of Justice Assistance publishes an annual report of
crime and arrests reported by law enforcement agencies in the state. For 2007, its
latest publication, the reports are split. In the report on crime, it defines property
crime as four offenses: burglary, theft, motor vehicle theft and arson. It relies on
the UCR definition of property crime as being the object theft-type offenses
where the taking of money or property occurs without force or the threat of force
against the victim. However, it defines the category of “theft” as including all
thefts, other than motor vehicle thefts, in which no force, violence, or fraud
occurs. By definition, insurance fraud is excluded from this report.
The problem with the number of thefts and motor vehicle thefts reported is
that part of many insurance fraud schemes include the reporting of property,
including automobiles, as stolen, so that an insurance claim can be made.
Statewide, $170 million in property was stolen, $63 million of that was recovered.
Approximately 63 percent of the property reported in stolen in Wisconsin for
2007 was not recovered (Crime in Wisconsin, 2007).
According to Table 19 in 2007 arrest information reported by law
enforcement agencies in Wisconsin, there were 181,870 arrests for theft, motor
vehicle theft, fraud, stolen property, vandalism, and all other except traffic
violations. Arrests for fraud, defined as “the intentional perversion of the truth for
the purpose of inducing another person or other entity in reliance upon it to part
with something of value or to surrender a legal right. Fraudulent conversion and
obtaining of money or property by false pretenses” (Arrests in Wisconsin 2007, p.
262), totaled 7,414 arrests. It is not known how many of the arrests for fraud
were for insurance-related crimes. It is not known from the other categories of
arrests constituting the balance of arrests (174,456 arrests) whether the related
crimes contained any element of insurance fraud.
The estimated population for July 1, 2007 in Wisconsin was 5,598,893
according to the U.S. Census Bureau (2009). Combining arrest data for arson and
fraud in 2007, there is a .14 percent arrest rate in Wisconsin (14 arrests
per/100,000 Wisconsin residents).
In its program overview and consumer information on insurance fraud
provided on its website, the Federal Bureau of Investigation (n.d.) estimates that
fraud in the insurance industry costs American families anywhere between $400
and $700 per year in increased insurance premiums. Not included in this figure is
the cost to consumers for goods and services provided by companies whose
insurance companies have been defrauded by phony claims of injury and other
bogus claims. The amount paid for a hamburger at a favorite burger joint will rise
when the restaurant has to recoup its losses paid in its own higher insurance
premiums. It is indeed a vicious circle.
Since insurance companies have to fear allegations of bad faith and unfair
business practices, they are between the proverbial rock and hard place when it
comes to questioning first party claims (i.e., claims asserted against the insurance
company directly by its insured). In the wake of Hurricane Katrina, the FBI
reported that 1.6 million claims were filed equaling $34.4 billion in allegedly
covered perils; government funding provided $80 billion towards reconstruction
but the FBI estimates that $6 billion was fraudulently obtained (FBI, n.d.). The
FBI obtained more than 70 indictments and 60 guilty pleas in just one post-
Katrina fraud case its task force investigated (id).
Like only eight other states, the State of Wisconsin has no cohesive
system in place for the detection and prosecution of insurance fraud. The state
has no insurance crime bureau to act as the hub of anti-fraud efforts in Wisconsin.
Other states lacking central oversight of state antifraud efforts include Alabama,
Illinois (although it has opened a fraud bureau designated to worker compensation
fraud), Indiana, Maine, Michigan, Oregon, Vermont and Wyoming (Taarud,
Escalating insurance fraud in a weakened economy
Desperate times create desperate measures according to the National
Insurance Crime Bureau’s (NICB) most recent report (2009). The report
compares questionable claims submitted by member companies in the first quarter
of 2008 and the first quarter of 2009 due to the economic downturn the country is
experiencing. Analysis of questionable property claims referred to NICB
revealed hail damage claims have increased by 407 percent, suspicious
disappearance/loss of jewelry claims have increased by 39 percent, flood/water
damage claims have increased by 38 percent, suspicious theft/loss (not
automobile) have increased by 17 percent, inflated damage claims have increased
by 15 percent, and fire/arson has increased by 6 percent.
The analysis of questionable casualty claims referred to NICB revealed
slip and fall claims increased by 60 percent, staged/caused accidents increased by
34 percent, unbundling/upcoding of medical treatment has increased by 34
percent, jump-in bodily injury claims increased by 32 percent, excessive medical
treatment increased by 25 percent, billing by medical providers for treatment not
rendered increased by 23 percent, bills inflated by medical providers for treatment
increased by 18 percent, faked and exaggerated injuries increased by 10 percent,
and claims for prior injuries increased by 6 percent. Three categories experienced
decreases: duplicate billings (-11 percent), solicitation by chasers and cappers
(-13 percent), and improperly licensed or incorporated providers and facilities
Questionable commercial claims analysis revealed increases across all
categories except cargo theft (-20 percent), vehicle theft (-23 percent) and farm
loss (-100 percent). Slip/falls and fire/arson have increased significantly by 77
and 76 percent, respectively. Product liability claims climbed by 63 percent.
Construction/farm/heavy equipment claims not theft related, inflated inventories,
false or inflated business interruption claims, suspicious foreign object in food
claims, and theft (not automobile) increased by 40 percent, 32 percent, 31 percent,
13 percent, and 8 percent, respectively.
Worker's compensation suspicious claims were analyzed in the report and
revealed that premium fraud increased 71 percent, false loss statements increased
52 percent, duplicate billing increased 50 percent, disability claims increased 47
percent, working other jobs while collecting worker's compensation increased by
41 percent, material misrepresentations increased a total of 78 percent (combined
for employment applications and fraud warning forms), claimant fraud increased
by 13 percent, prior injuries and injuries not related to work increased by 11
percent, and false loss of wages increased by 9 percent. False mileage
reimbursements remained the same.
Analysis of vehicle referrals and miscellaneous referrals also reveals
increasing questionable claims with the greatest increase of 463 percent occurring
in catastrophe claims (see Appendix E for a complete chart describing these
The Coalition Against Insurance Fraud (2009) warns that some insurance
crimes have already begun to spread in the wake of America’s depressed
economy. The NICB is seeing 3 – 5 inquiries per week related to suspect vehicle
thefts in Wisconsin alone. These numbers are up from three per year. So many
“stolen” cars in the Milwaukee area were dumped into a nearby quarry that they
were stacked like cars in junk yard (Coalition Against Insurance Fraud, 2009).
Home arson is also on the rise as desperate homeowners attempt to escape
foreclosure, a trend that is continuing since 2006. Neil Johnson, Assistant Vice
President and Manager of Liberty Mutual’s premium fraud investigative unit is
seeing otherwise honest people becoming desperate to protect their families and
committing insurance fraud (Coalition Against Insurance Fraud, 2009).
The scope of the insurance fraud problem is wide, but this can only be
shown by states that maintain the data to measure and document it. With its lack
of a fraud bureau, Wisconsin is incapable of measuring the scope of the problem
in the state and its impact on consumer premiums or the economy generally.
Consumers have been defrauding insurance companies for probably as long
as there has been insurance. The term “fraud” has been used loosely in everyday
language. “Fraud” actually has a legal definition originating in English common
law. Black’s Law Dictionary (6th ed.) defines fraud as a purposeful deception to
gain advantage over another including concealment of the truth (see Appendix B
for the complete definition). Lesch (2008) identifies the discrepancy in the
literature of the definition of fraud, noting that there are informal and formal
definitions. Informally, fraud is either soft or hard. Formally, insurance fraud has
four essential elements: that a material misrepresentation of fact is made, the
misrepresentation is made knowingly, the victim relies on the misrepresentation,
and the victim consequently suffers damages. Legal standards of fraud vary from
state to state but are nonetheless well recognized (Lesch, 2008).
The key term within the common law definition involves intent. Fraud
committed within the insurance industry is a specific form of fraud. The goal is
always the same: money. While the insurance industry largely follows the
common law definition of fraud, there are certain ways in which a state’s statutory
definition of the term may differ as noted by Lesch (2008). Despite variances
among the states, insurance fraud is a crime in most states, including Wisconsin.
In Wisconsin, insurance fraud is defined in the statutes as a criminal
offense (Appendix C) and the penalties for committing acts that constitute fraud,
arson, and workers compensation fraud are outlined below. Wisconsin defines
acts that constitute fraud and specifically includes misrepresentation in both the
application and claims process within the statutory language. The charge for
insurance claim fraud is a Class A misdemeanor if the claim value is not greater
than $2500. A Class A misdemeanor carries a fine up to $10,000, jail for less
than one year, or both. If the claim value exceeds $2500, the charge is a Class I
felony which carries penalties of not more than $10,000 in fines, or up to 3.5
years in prison, or both. Arson fraud is charged as a Class H felony which carries
penalties of not more than $10,000, or up to six years in prison, or both.
Worker compensation fraud is governed in part by general fraud statutes.
However, there is a specific statute for worker compensation for insurers to
follow regarding investigation and reporting to the State for referral to the district
attorney for prosecution. W.S.A. § 102.125 suggests reporting worker
compensation fraud to law enforcement only in circumstances where reporting
will not impede the defense of the claim. Therefore, in light of existing
legislation, Wisconsin has the framework in place upon which to build a
centralized antifraud effort. Through legislation, regulation and enforcement,
fraud can be prevented and prosecuted (Emerson, 1992).
In addition to the framework established by Wisconsin law, federal
statutes can also be applied to fraud. When a person uses the United States mail
or wire transmission to submit fraudulent information to an insurer, mail and wire
fraud charges can be attached for prosecution. Where an organized crime ring is
committing a pattern of fraud, state and federal Racketeer Influenced and Corrupt
Organization laws can be applied (see Appendix D for applicable federal statutes).
Chapter 946 of the Wisconsin Statutes contains the Wisconsin Organized Crime
Control Act, the state version of the federal RICO statutes. Racketeering crimes
are a Class E felony in Wisconsin and carry stiff penalties. These laws are
designed to investigate, control, and prosecute organized crime at the state and
federal level. Both criminal prosecution and civil actions can be brought under
these types of laws.
Fraudulently obtaining insurance proceeds from an insurance company
under property or casualty policies or policies or from any other line of insurance
can be achieved in a number of ways: padding claims, bogus claims, arson fraud,
premium fraud, misrepresentation or concealment in the application process
and/or misrepresentation or concealment in the claims process. On legal
principle, while fraud requires intent, misrepresentation in the application or
claims process generally does not. Therefore, the common law definition of fraud
is not a strict application as previously discussed.
In the literature, insurance fraud is typically defined as either soft or hard.
Soft fraud involves exaggerated claims. This occurs typically when a
policyholder claims greater injuries from an auto accident than what actually
occurred, prolongs medical treatment by malingering, or otherwise pads property
claims, or lies on an application for insurance. Tennyson (2002) describes soft
fraud as opportunistic. It “involves attempts to get excessive payments for an
insured event that is otherwise legitimate” (p. 36). It involves exaggerated claims
known as claim padding or build up and can result whenever the opportunity
presents itself. Usually claimants attempt to make up for paid premiums or for
the deductible on a claim. Without proper investigation, these types of claims are
often hard to prove and therefore cannot be referred for prosecution; the claims
typically cannot even be defended.
Hard fraud occurs when people set out to defraud insurance companies. It
is described by Tennyson (2002) as planned fraud involving “a systematic effort
to gain insurance payments by falsifying an accident or injury, and may be carried
out by professionals” (p. 36). This type of fraud is easier to detect, prove and
prosecute because the claims present a number of indicators or red flags.
Fraud is committed across all lines of insurance. There is no shortage of
scams and schemes across property, casualty, and worker compensation
insurance. In the automobile insurance industry, there are multiple schemes
operating among creative insureds and organized crime rings. Arson is particular
area of concern for anti-fraud professionals because of the current state of the
housing market. The literature supports a growing trend in arson for insurance
Property fraud schemes are committed through arson, theft, staged or
enhanced burglaries, and damage claims (natural disaster, smoke, water,
structural, that are enhanced or entirely made up). Also included in this category
is automobile theft which is a substantial problem all in its own. Automobile theft
includes the creation of paper vehicles (no vehicle exists but it was insured
because paper of its existence was submitted to the insurance agent), VIN
switched vehicles (the car that is insured is not really the car the policyholder is
making a claim on), theft for parts (this scheme can play out in a number of
ways), vehicle cloning and export rings, and owner give ups as a few examples.
There are others.
Arson is a growing problem in the current state of the economy as
homeowners and business owners struggle with mortgage payments. In a report
issued by the National Fire Protection Association (2008), Karter found that
intentionally set structure fires increased by 4.8 percent since 2006. The total
property damage from intentionally set structure fires (~32,500) decreased by 2.9
percent to $733 million. Intentionally set vehicle fires (~20,500) caused $145
million in property damage in 2007, up by 8.2 percent since 2006.
In Wisconsin, Arson is defined in the 2007 crime report according to the
Uniform Crime Reporting program. It involves an act with or without the intent
to defraud that is willful or malicious burning, or attempted burning, of a dwelling
house, public or commercial building, motor vehicle, aircraft, or personal property
of another. In 2007, the Wisconsin Office of Justice Assistance reported that $24
million of property was damaged by arson across Wisconsin.
The number reported by OJA is skewed downward because only the fires
determined as “arson” by the ATF, State Marshall and/or local fire departments
are included in this report. The Wisconsin’s Office of the State Fire Marshal
investigates fire and explosions of an incendiary nature in response to fire or law
enforcement requests. It does not investigate at the request of insurance
companies (Wisconsin Department of Justice, Division of Criminal Investigation
web page, n.d.). The number of structures and motor vehicles intentionally
burned by policyholders for insurance claims is not known if no determination of
arson is made by the authorities and the claims must be paid. In 2007, 259 arrests
for arson were made statewide (Table 19, p. 259).
Casualty fraud schemes involve injuries that are either exaggerated or
entirely made up. Some of these scams include the historical “slip and fall”,
product liability (like getting burned by a cup of hot coffee), staged automobile
accidents, caused accidents (drive downs, sideswipes, t-bones, swoop and squat,
etc.), paper accidents, doctor-lawyer conspiracies, and generally inflated claims.
Workers’ compensation fraud is not just committed by the employee who
either fraudulently claims to have been injured on the job to collect benefits or
exaggerates his injuries. This type of fraud is also committed by companies who
are insured by either falsely stating the line of business they are in, the numbers of
people the company employees, or where the company does its principal place of
business—all factors that affect the premium the company pays to insure its
Fraud has become more than a money game and can cost human life as
evidenced by the 2003 death of an elderly woman involved in a staged auto
accident ring with relatives in Essex, Massachusetts (Derrig, Johnston & Sprinkel,
2006). The 64 year old woman was killed when she attempted an auto fraud scam
with other family members.
As discussed by Bourhis (2005), insurance coverage dates back to ancient
China and Babylonia. Shipping goods on treacherous river waters was risky (i.e.,
costly) until the risk was divided among many maritime merchants. Insuring
against maritime loss continued to be utilized through Greek, Roman and
Byzantine times. Since nearly the beginning of time, civilizations insured their
goods against loss. Today’s consumers insure themselves against loss in a variety
of ways including purchasing various types of insurance. Property and casualty
insurance generally includes all insurance lines except life, health and disability
insurances. It is the umbrella under which automobile insurance is located.
These are the types of insurances typically purchased directly by the consumer.
Additional insurance to protect consumers includes health insurance, workers
compensation, and disability insurance and can be purchased by an employer, a
self-employed individual, or, in most instances, by an individual consumer.
As noted by the Insurance Information Institute (n.d.), insurance for
consumers, businesses and institutions is now a necessity for the functioning of
any free enterprise. Credit and financing cannot be obtained without insurance
protecting lender investments. Insurance companies are public or privately held.
Therefore, many insurance companies, as trustee of insureds and stockholders,
become major investors and suppliers of capital to the economy. In sum,
insurance substantially benefits society as a whole and impacts the entire
economy. When fraud is committed against the industry, it takes a heavy toll on
Consumer Attitudes Toward Fraud
In his paper presented at a workshop on insurance research in Oslo,
Norway, Lesch (2008) reviews the scant research on consumer attitudes toward
insurance fraud over time. However, from the existing literature Lesch posits that
the majority of consumer attitudes toward insurance fraud favor fraud and the
American public’s perception of the insurance industry as a whole is negative
(2008). He argues that the insurance industry itself is part of the problem due to
states’ differing postures on the issue.
The insurance policy is a contract and therefore must be honored in good
faith and fair dealing by the insurance company. When an insurance company
does not act in good faith, it can be sued in tort for bad faith, among others, and
pay out extra-contractual monetary damage awards. An insured is supposed to
reciprocate the notion of good faith and fair dealing toward its insurer. However,
because insureds pay premiums for their insurance policies, there is a
misconception among consumers that overstating claims is allowable simply
because they have paid their premiums.
What consumers continually fail to understand is that insurance premiums
are, in effect, pooled so that the risk of any particular event occurring can be
covered by the pool. When catastrophic events occur, insurance companies need
to tap the pool to provide economic relief for every covered peril affecting its
insureds. Where a carrier does not have adequate reinsurance as protection for the
pool, bankruptcy will occur. As one example, a nationally recognized carrier
recently closed its book of business in the State of Florida. Combined with its
investment strategies that could not weather the current economic storm, it could
no longer cover its insureds after the heavy toll the most recent hurricanes and
fraud has taken.
As Emerson (1992) explains, “Insurance fraud sets a vicious cycle in
motion: insurance companies continue to increase premiums for the entire pool of
insureds in order to cover the higher losses, while some consumers file for
additional uncovered amounts to make up for the higher premiums charged”
(Section III(A), para. 3).
Various studies on consumer attitudes toward fraud have been conducted
by the Insurance Research Council. Findings suggest consumers can be grouped
into one of four groups: moralists, realists, conformists and critics, from the least
accepting of fraud and favoring harsh punishment to those who are critical of the
insurance industry and have the highest acceptance of fraud (Coalition Against
Insurance Fraud, 1997).
Cluster analysis from the Four Faces of Fraud landmark study on
consumer attitudes toward fraud (Coalition Against Insurance Fraud, 1997)
supports broad sociological influences in consumer attitudes of fraud. Moral-
psychological factors are also at play since empirical evidence reveals that fraud
is more acceptable when it is rationalized, discussed further in the chapter related
to the theoretical framework of fraud. As noted by Tennyson (2002), results of
the IRC and Coalition Against Insurance Fraud studies finding that attitudes
toward fraud are ethics based coincide with “social science theories of attitude
formation” (p. 37).
Consumer attitudes more inclined toward insurance fraud appear in
surveys with beliefs that insurance fraud is a victimless crime, the risk of getting
caught is low, and if caught, the punishment is modest, and there is no social
stigma attached to the crime. These are critical misperceptions by insurance
consumers because all insurance consumers are victims of fraud when it occurs
because “companies pass along the cost of fraud to current and future
policyholders in the form of higher premiums” (Dean, 2004, p. 68).
Organizations such as the National Insurance Crime Bureau, the Coalition
Against Insurance Fraud, the National Association of Insurance Commissioners,
and the National Association of Mutual Insurance Companies developed in
response to the growing problem of insurance fraud. Over the years, the problem
with fraud against Medicare and Medicaid programs has also grown substantially.
The recognition of fraud against federal programs and the many schemes and
scams involved in the fraud created an awareness of the need to also detect fraud
in the insurance industry. While automobile insurance fraud has been a problem
for many years, the number of frauds committed against the insurance industry is
limited only by the creativity of the perpetrators.
As noted by Lesch (2008), “the early 1990’s represented in turning point
in the management of insurance fraud” (p. 12). New legislation was created
across the states to change the level of government regulation of and fraud
management by increasing the number and nature of state fraud bureaus.
However, the legislation that grew out of the recognition of the increasing
insurance fraud problem did not grow uniformly across the states. Essentially
three models developed to combat insurance fraud (Abramovsky, 2008). The
integration and coordination of efforts between the insurance industry and
government through legislative efforts, or the lack thereof, aligns with the models
on certain points.
As noted by Abramovsky (2008), most states have an insurance fraud
bureau (see Appendix F for a pictorial representation of state fraud bureaus),
created through legislation, housed in the Department of Insurance, the office of
the Attorney General, or another governmental agency. States that fit within this
model all align on the sole point that a bureau has been created. Massachusetts
represents a model unto itself because it is the only fraud bureau in the country
structured by legislation and funded the way that it is; all insurance companies
doing business in Massachusetts are statutorily required to report even suspected
cases of fraud to the bureau for investigation and not just cases confirmed as
fraud. The third model is represented by states that have no bureau or central
oversight of anti-fraud efforts although the states may align on other points.
States must either report suspected cases of fraud or furnish information to law
enforcement upon request to investigative agencies, or both (see Appendix A for a
chart featuring key state laws in all states).
The growth of antifraud legislation across the United States has grown
significantly since the 1990s, with Wisconsin and a few other states lagging
behind (Hoyt, Mustard, & Powell, 2004). States lagging behind that also have
tort laws are doubly affected by fraud. In states that use a tort approach to bad
faith, like Wisconsin, Tennyson and Warfel (2009) found that insurers are less
likely to deny suspicious claims and pay higher claims overall resulting in higher
premiums for consumers to avoid costly bad faith litigation. The literature
supports the argument that bad faith laws reduce insurer incentives to question
suspicious claims; tort laws designed to protect insureds from bad faith by the
insurance industry ultimately contribute to increased fraud (Tennyson, 2008).
While there has been growth in other states’ progress toward antifraud efforts,
Wisconsin remains stagnant.
In addition to fraud bureaus, insurance industry antifraud efforts include
Special Investigative Units (SIU) in most, if not all, states including Wisconsin.
Insurance companies house their own SIUs or contract the services with outside
vendors. The Coalition Against Insurance Fraud conducted a study on
performance measurement of SIUs in 2003. It sought to learn how SIUs are
evaluated in the United States. No earlier data or studies were available.
In its study, surveys were mailed to 110 SIU managers, a cross section of
the industry representing all lines of insurance in 2002. Fifty two surveys of the
110 were returned. Of that amount, 44 percent consisted of large companies that
wrote more than $1 billion direct annual premiums, 32 percent medium
companies that wrote between $250 million and $1 billion, and 24 percent small
companies writing less than $250 million per year. Coalition Against Insurance
Fraud concluded that while 87 percent of the sample sponsored formal program
evaluation, there was no measurement consistency among any of them.
In addition to reporting requirements and requirements for release of
information when requested by the proper agencies, annual reports may need to
be filed as well. California is heavily regulated by its Department of Insurance.
Insurance companies doing business in California are required to file an annual
report with the state. Companies are audited for purposes of compliance and
performance evaluation. Where a company is not compliant with its own plan, it
can be penalized by the DOI.
In states with no fraud bureau, lax sentencing guidelines and limited
enforcement resources send the message that the government neither vigorously
prosecutes nor convincingly punishes insurance fraud (Emerson, 1992, Section V,
para. 3). This is supported by Taarud’s (2006) findings that Wisconsin convicts
roughly half the fraud that Iowa does per capita despite the relative populations of
the states. Lesch (2008) notes that confusion about insurance fraud stems from
the decentralization of regulation. Even though most states have fraud bureaus,
only 28 state fraud bureaus have police powers and only 24 bureaus have
dedicated prosecutors (Coalition Against Insurance Fraud, 2007).
Findings from Taarud’s (2006) research include a strong correlation
between the existence of a state fraud bureau and higher prosecutions of insurance
fraud. This is especially notable when compared to Taarud’s (2006) findings of a
0.26 conviction rate in Wisconsin based on his research through clerks of court
2005 charges by insurance fraud statutes. Per capita convictions averaged 1.09
among all bureaus that reported data in 2005 (Lesch, 2008). However, Taarud
found that the per capita conviction rage averaged 1.13 among state fraud bureaus
(2006). Given Taarud’s findings, Wisconsin lags substantially behind in
convictions per capita.
Emerson (1992) argued that all states should have a governmental bureau
exclusively concerned with antifraud efforts. A joint effort between public and
private sectors allocating necessary investigative and prosecutorial resources is
imperative. The resources expended will be reconciled through prevention,
restitution and fines.
Even despite the lack of a state fraud bureau in Wisconsin, prosecution of
insurance fraud should not be an issue. Insurance fraud is a crime in Wisconsin.
According to Emerson (1992), there is a common understanding of fraud among
legal experts and laypersons. Further, there is agreement that laws exist to
achieve certain goals: punish, prevent, reduce, or compensate for fraud.
Legislation has been created to advance these goals. The commission of fraud is
a violation not only of criminal law. Common law fraud was premised upon the
notion of intent. That is, people who commit insurance fraud do so willfully. In
so doing, they violate common legal and moral values.
Fraud is more than just a typical civil wrong because it is intentional and
usually a crime. Beyond determining liability and providing restitution to the
injured party, it involves issues more properly placed within the prevue of
criminal law deterrence and punishment. However, fraud continues to be
“inadequately detected, insufficiently reported, lackadaisically prosecuted, and
lightly punished” (Emerson, 1992, Section I, para. 3). This is supported by the
number of cases reported to the National Insurance Crime Bureau versus the
number of cases that are prosecuted (Taarud, 2006). In 2005, Wisconsin
insurance companies referred 501 questionable claims to the National Insurance
Crime Bureau (Taarud, 2006). As noted previously, only 21 cases were
prosecuted in Wisconsin in 2005.
Price (2001) discusses the problem of persuading the prosecution to
charge insurance cases suspected of involving fraud. This problem is even
apparent among health insurers and local law enforcement agencies that desire
charging in Medicare and Medicaid fraud cases; federal investigators teach
insurance investigators and law enforcement agencies how to prepare cases for
prosecution (National Healthcare Antifraud Association, personal communication,
April, 2006). At its training academies, the National Insurance Crime Bureau
similarly teaches the same for cases involving insurance industry fraud.
Having a fraud bureau in a state does not guarantee a case will be
prosecuted. Oftentimes, the prosecution must be presented with a sure conviction
(Price, 2001). However, civil penalties that are built into state fraud laws bolster
antifraud efforts because fraudsters can be penalized without waiting for
prosecutors to bring criminal charges. Interestingly, most jurisdictions will allow
criminal convictions to be admitted as evidence in civil actions (American
Educational Institute, Inc., 2006). If a civil action follows a criminal action
involving the same facts, a criminal conviction strengthens the civil suit and
potential for damages.
Convincing the prosecution to charge fraud cases in states that do not have
centralized anti fraud efforts remains another part of the fraud problem as
discussed previously. Even in states that do have fraud bureaus, at least seven
bureaus are dedicated to workers’ compensation fraud only. Some states operate
a workers’ compensation fraud bureau in addition to an insurance fraud bureau.
Wisconsin has neither.
The 2001 survey conducted by the Coalition Against Insurance Fraud
collected data from the state fraud bureaus that were created by legislation. The
survey was sent to all 46 bureaus. A total of 41 bureaus responded and the states
they are located in represent at least 78 percent of the population in the United
States. The survey was part of a four part analysis of the general performance of
fraud bureaus during the period 1995 to 1999. The purpose was to determine
some measure of performance of fraud bureaus across the United States. Results
from a second five-year analysis conducted in 2007 by the Coalition which covers
the period 2001to 2006 was compared to the 2001 study for this research, together
with the study conducted by Taarud (2006) of insurance fraud in Wisconsin.
In the first five year period (1995—2000), the data collected cannot be
strictly averaged. Data in some categories or for some years in certain states, or
both, is incomplete. In rough approximation, all fraud bureaus collectively
averaged 10112.4 referrals, 2230.9 open investigations, 365.1 cases presented for
prosecution, 184.5 convictions, and 300.5 civil actions. Five of these bureaus, in
Washington, Rhode Island, Minnesota, Georgia and Tennessee are dedicated
worker’s compensation bureaus. The number of cases presented for prosecution
and the number of convictions among all bureaus doubled since 1995. Civil
actions tripled. Out of the cases referred, 22 percent were opened for
investigation, 16 percent were sent for prosecution, 5 percent achieved
convictions, and 28 percent experienced civil action. States with the broadest
immunity laws experienced the highest number of cases referred to the bureau.
In the second five year period (2001—2006), the same limitations apply.
Not all data is complete in all years or in all categories, or both. Fraud bureaus
during this period collectively roughly averaged 10,971.4 referrals, 3030.6 open
investigations, 526.2 cases presented for prosecution, 406.7 convictions, and
548.1 civil actions. Of the bureaus, eleven bureaus are dedicated worker’s
compensation bureau. Of the cases referred, 28 percent were opened for
investigation and 17 percent were eventually sent for prosecution. Of the cases
referred for prosecution, convictions were obtained in 77 percent and 53 percent
also experienced civil action.
Despite the great variance in the structure, focus and capabilities of the
participating bureaus, the compilation of figures from data sets gathered in the
two studies over a ten year period by Coalition Against Insurance Fraud reveals
increasing budgets, increasing numbers of investigators, analysts, support staff,
and management, and the development of more effective tools and techniques for
detecting fraud. In bureaus lacking adequate budget and personnel, there does not
appear to be much increase in cases opened for investigations from year to year.
Taarud’s (2006) study of insurance fraud in Wisconsin is especially
noteworthy here. Research through clerks of court in Wisconsin counties found
that 21 cases of insurance fraud were charged in 2005 in Wisconsin with fourteen
resulting in guilty or no contest pleas. In comparison to Iowa, a state (with a
fraud bureau) that is similar to Wisconsin on a number of variables (geography,
insurance laws, and crime rate), Iowa prosecutes twice as much insurance fraud
(Taarud, 2006). Lacking a state fraud bureau, Wisconsin referred just over 500
cases to the National Insurance Crime Bureau in 2005 and only 14 convictions
were obtained (Taarud, 2006). No restitution orders for insurance companies
were found in the clerks of court research in Wisconsin county courts.
Based on the ten year analysis by the Coalition, all fraud bureaus are
making at least small improvements in performance which translates into greater
fraud fighting ability. Overall, although the number of referrals has increased
over the past five years, cases opened for investigation and cases presented for
prosecution appear somewhat stagnant. Convictions climbed steadily from 2001
to mid-2004 and then dropped somewhat. Civil actions grew sharply from 2001
until mid-2003 when they dropped again. Areas for improvement tend to be
needed in bureaus with no dedicated prosecutors, in most, but not all, consumer
education programs presented by the bureaus, and the overall measurement,
monitoring and impact of fraud.
It is clear from the literature that insurance fraud is a problem whose
effects have not been measured in Wisconsin. The data available from other state
bureaus clearly shows the escalating level of fraud as offenders are becoming
increasingly more sophisticated and complex in their crimes. Without a bureau,
Wisconsin lacks the capability of identifying and measuring the level of insurance
crime across the state.
SECTION III: THEORETICAL FRAMEWORK AND ANALYSIS
Public policy and theory are inextricably woven. Criminological theory in
many ways guides policymakers in the creation of real world rules that impact
everyday life. To make recommendations addressing the scope of the insurance
fraud problem, one has to consider both the theoretical cause of the problem and
its solution. Insurance fraud is arguably caused by what consumers have learned
they can do to commit the fraud. As such, social learning theory, which integrates
a variety of related theories, is applicable to the explanation of both soft and hard
fraud. Where soft fraud is generally an opportunistic crime, hard fraud involves
planning. The remedy to fraud lies in deterrence theory.
Social Learning Theory
By human nature, the way any particular person behaves is primarily a
result of learning. The process of learning does not occur in a vacuum.
Behaviors are developed from individual and societal levels. In both micro and
macro environments, behavior is shaped.
The theory that encompasses the idea of social learning is both a
psychological and social perspective. Schmalleger (2007) finds that social
learning theory is the framework that houses both differential association and
reinforcement theories. In selected readings from Cullen and Agnew’s essential
readings in criminological theory (2003), it is noted that Edwin H. Sutherland is
the author of Differential Association Theory. The tenets of differential
association form the root of social learning, such that learning criminal behavior
is a process no different than learning non-criminal behavior. Learning occurs
through association with others and expresses general needs and values.
Akers and Burgess reformulated Sutherland’s theory into Differential
Association-Reinforcement Theory which later grew into Akers’ broader theory
of social learning (Cullen & Agnew, 2003). Learning behaviors – criminal or
otherwise – entails a complex synergy of differential rewards and punishments,
among other factors according to social learning theory.
In further developing differential association, Burgess and Akers (Cullen
& Agnew, 2003) reduced Sutherland’s nine primary theoretical tenets to seven
statements. The result forms the basis of an integration of classic behavioral
learning principles of rewards and punishments and the operation of stimuli to
change behavior. The argument is that operant conditioning is a necessary
mechanism for learning to occur even though patterns of behavior and overall
values are learned in associations with others. Therefore, behavior is learned by
its consequences. Acts that are rewarded or reinforced will repeat, and acts that
are painful or punished will extinguish. In effect, criminal behavior is
conditioned and its probability, frequency, and duration is a function of behavior
Insurance fraud is caused by an intricate mix of circumstances and
motivations (Tennyson, 2008). This interplay of events is moderated by
opportunity, social norms, morality and institutional context. The social
psychological theory of differential association which explains between-
individual differences (Farrington, 2003) can be adapted to explain within-
individual variations of offending over time in consideration of rational choice
and routine activities theories. Since people are affected by the kinds of
associations they have and the company they keep, it is possible to incorporate
both a rational choice perspective and routine activities theory to explain the
development of insurance fraud. Indeed, Felson (2001) argues that the routine
activity approach is “closely linked to an entire cluster of theories and prevention
approaches” (45). The literature is clear on the link between rational choice and
Rational choice perspective
In consideration of the processes by which learning occurs, it is important
to note that human behavior is mediated by rational (or irrational) thought. From
the perspective that rational choice is involved in the behavioral process, one must
consider its effects. From this perspective, crime occurs when the benefits of
committing the crime outweigh the costs. The costs of committing crime must
outweigh the benefits for crime reductions to occur.
The ability to commit fraud is a learned behavior that is enmeshed with
particular attitudes toward the permissiveness of fraud. Brinkmann and Lentz
(2006) found that consumer attitudes toward insurance fraud are better explained
in a larger societal framework. Where there is no social stigma attached to a
crime and little chance for punishment, consumers will tolerate fraud because it is
easy to rationalize. Tennyson (2008) posits that individuals learn attitudes from
others. If insurance fraud is accepted by one’s peers then one will be more likely
to also find fraud acceptable. Higher public tolerance for fraud, or the perception
that fraud is commonplace, will in turn lead to more accepting attitudes and lower
social costs of engaging in fraud. Societal responses may conversely reinforce
social norms. Rationalizations may increase dishonesty by facilitating self
deception. Empirical studies support the idea that attitudes condoning fraud
perpetuate excessive claiming. Emerson (1992) notes the economic disincentive
to commit insurance fraud is rare. In today’s weakened economy, this is
evidenced by the 2009 report issued by the National Insurance Crime Bureau that
most frauds are increasing.
According to Sutherland’s theory of differential association, learning
occurs not just in face-to-face environments. People learn in passing from others
where no ongoing relationship has to exist, through the media, and through mass
communications. As Warr (2001) stated, Sutherland rejected the assumption that
crimes are committed by “an ontologically distinct category of human beings
whose behavior requires separate or unique explanation from other forms of
human behavior” (p. 185). The key principle in Sutherland’s theory, the root of
social learning theory, is that a person who learns more rationalizations and
attitudes (“definitions”) to commit crime than definitions not to commit crime, the
greater the probability is for the commission of crime (Sutherland & Cressey,
2003). In the case of insurance fraud, this is perfectly logical. Where consumers
believe that recovering premiums or covering deductibles by inflation or creation
of claims, the greater the probability is the submission of fraudulent claims.
This idea is buttressed by another principle of Sutherland’s theory – if
consumers when entering the insurance-consuming arena, are exposed to how to
defraud more intensely, frequently, and for longer duration (Warr, 2001) by other
dishonest consumers than antifraud objectives, the more probable it is that fraud
will be committed. What is known as soft fraud is therefore arguably committed
though rational choice, a traditional economic choice theory (Cornish &Clarke,
2003), because it is primarily opportunistic. Soft fraud is more probable, more
frequent and lasts longer when the fraudulent claims are not questioned and are
Akers’ social learning theory takes this notion one step further by positing
that Sutherland’s differential association also involves the concept of
reinforcement and the anticipation of reward or punishment for committing fraud
(Akers, 2001). Classic operant conditioning contributes to the reality that fraud
against insurance companies that is not punished is conversely rewarding.
Rational choice perspective (Clarke & Cornish, 2001) offers a general
framework for crime causation and situational crime prevention by increasing the
perceived effort to commit fraud, increasing the perceived risks in getting caught,
reducing the reward, and removing excuses for committing fraud. It is argued
that rational choice perspective derives from a microlevel perspective in that it
deals with ways in which opportunities are perceived, evaluated and acted upon
by individual offenders, whereas routine activities theory draws from a macro
level perspective because it posits that changes at a societal level that expand or
limit crime opportunities deemphasizes the individual offender. At either level,
the general framework is applicable. Criminal fraud is chosen because it is
beneficial to the doer. To make fraud non-beneficial would reduce the incidence
Routine Activities Theory
In addition to the idea that behaviors are learned by rational beings,
whether the behaviors involve criminal or non-criminal acts, is the imperative for
opportunities to act on learned behaviors. Routine activities theory is outlined by
the availability of suitable targets, the absence of capable guardians, and
The routine activities of the insurance industry in Wisconsin which lacks
capable guardians make the industry an ideal target for motivated fraudsters.
Hard fraud, which is typically planned, is supported by routine activities theory
because it requires planning in advance. Planning for fraud requires (1)
availability of suitable targets (the insurance company); (2) absence of capable
guardians (no or not enough fraud watchdogs); and (3) motivated offenders
(insurance frauds are quick cash for offenders) (Felson, 2001). Targets like
insurance companies are more likely to be victimized if they are poorly guarded
and exposed to motivated offenders, like the insurance companies in Wisconsin.
Reducing the incidence of hard fraud requires reducing the attractiveness
of the insurance industry as a suitable target. If a fraud bureau was established in
Wisconsin to act as the guardian of the insurance industry, the target
attractiveness may reduce. Offenders would no longer be able to move about the
many insurance companies doing business in Wisconsin without being identified
by the central oversight of a bureau. All insurance companies would report
suspicious claims to the state fraud bureau that, in turn, would work with the
National Insurance Crime Bureau, and create a unified front in detection and
investigation of mobile fraudsters and insurance crime rings in Wisconsin.
On the assumption that humans are rational beings, a general theory of
deterrence developed over time. The pillars of deterrence theory are that
punishment of criminals has to be certain, swift and proportionately severe to the
crime. The idea of rationality is important in supporting these pillars. When one
is able to reason that committing an offense will bring about certain
consequences, he will be deterred from committing the offense. Both direct and
indirect experiences of punishment and punishment avoidance affect a person’s
ability to rationally consider an act’s consequences.
The literature on deterrence theory divides specific and general deterrence
into two distinct processes, dealing with direct and indirect experiences of
punishment. Stafford and Warr (2003) argue that deterrence theory also involves
the avoidance of punishment and both direct and indirect experiences of it.
Therefore, deterrence theory encompasses four elements: committing fraud and
getting caught and punished (direct), knowing someone or about someone who
did (indirect), committing fraud and avoiding punishment (direct), and knowing
someone or about someone who did (indirect).
The underlying conflict is that punishment avoidance encourages crime
more than punishment does to discourage it. People generally have a mixture of
both direct and indirect punishment exposure as well as direct and indirect
punishment avoidance. The reconceptualization offered by Stafford and Warr
(2003) of the elements of deterrence theory is more easily synthesized with
learning theory and the critical difference between observational (direct and
indirect learning by seeing) and experiential (direct and indirect learning by
doing) acquisition of behavior. Deterrence theory therefore does not require the
distinct categories of general and specific deterrence. We acquire behavior by
both direct and indirect punishment and rewards, including punishment
Sentencing subjects guilty of insurance fraud acts as a general and specific
deterrent of fraud, but not as a specific deterrent for other crimes (Derrig & Zicko,
2002). Derrig and Zicko (id.) note the lack of available data or research that
measures any type of outcome for the prosecution of insurance fraud. Research
by the authors examined 10 years of data from the Insurance Fraud Bureau of
Massachusetts that revealed an effective specific deterrent for insurance fraud.
After initial disposition of the 543 cases reviewed, only one subject was again
referred to the IFB. General deterrence was indicated by the plateau of auto
bodily injury claims occurring since 1993. While those claims rose by 50 percent
between 1984 and 1993, the ratio stopped increasing in 1993. No significant
decrease has occurred, however.
The integration of a series of rewards and punishments into the private and
public sectors to deter insurance fraud, by recognition of consumers who refrain
from fraud as well as punishment to those who commit fraud is necessary in
deterring fraud. Additionally, formal and informal punishments are imperative.
Fraud must not only be formally sanctioned by the state, but it must also be
informally sanctioned by society through publication of formally sanctioned
To enhance observational and experiential acquisition of behavior and
deter fraud, an insurance fraud bureau would both educate consumers on
insurance fraud, and prosecute fraudsters criminally and civilly to increase direct
observational and experiential learning. To provide enhancement of indirect
learning, the fraud bureau could advertise its goals in an effort to educate
consumers on the serious financial impact fraud has on consumers. It could also
publicize convictions and civil actions in prosecuted and litigated fraud cases to
enhance consumers’ indirect experiential learning.
Ed Moran, head of Allstate’s Special Investigative Unit and claims’
assistant vice president, argues that deterrence is strengthened by publicizing
fraud cases because the public needs to know about people that steal the public’s
money (Best’s Review, 2001). Terrence Delehanty, general counsel for the
National Council on Compensation Insurance in Florida, agrees that publicizing
fraud convictions can have a deterrent effect (Fletcher, 2001).
The general theory of deterrence as reconceptualized by Stafford and Warr
supports the creation of a fraud bureau because the functions of the bureau would
enhance consumers’ direct and indirect observational and experiential learning.
Since refraining from fraud is learned in the same social learning environments as
committing fraud, a crime bureau can teach consumers the benefits of refraining
from, reporting, and reducing fraud, as state’s pivotal deterrent against fraud.
Insurance fraud is a crime resulting from learned behaviors. Crimes are
committed through rational opportunistic choices or routine activities of the
insurance industry. The social context in which these behaviors are learned can
be changed with proper education and experience of consumers. The prosecution
of insurance crimes and publication of convictions is a necessary component of
deterring fraud over time. Swift, certain and severe punishment of insurance
fraud can be achieved through the central oversight by a fraud bureau in
SECTION IV: SUMMARY, RECOMMENDATIONS AND CONCLUSIONS
Annual fraud losses are more than double total industry profits (Finnegan
& Simpson, 2000). The reduction of claim fraud presents a major area of
opportunity for the improvement of financial performance. Derrig (2002) argues
that insurance fraud bureaus that provide centralized antifraud efforts are “the
most efficient way to deal with appropriate sanctions” (p. 276). His argument
rests on the unique ability of bureaus to coordinate SIUs in the private sector with
law enforcement /prosecution in the public sector. There are legal, social,
organizational and resource constraints upon the industry as a result of fraud
(Finnegan & Simpson, 2000). Those constraints need to be removed.
In the Coalition Against Insurance Fraud (1997) series of focus groups in
three states and a telephone survey of 602 respondents, it was revealed that nine
out of ten people believe that suspected fraud should be prosecuted and 57 percent
believe lying and falsifying information warrants prosecution. Recommendations
include need evaluation studies by state insurance departments that lack state
fraud bureaus and the need for prosecutors to take an active and aggressive role in
publicizing fraud cases. Delehanty has witnessed the power of multidisciplinary
antifraud task forces that combine agencies at the federal and state level (Fletcher,
2001). Annual premium costs could decrease over a hundred million dollars with
better fraud detection techniques (Papa & Basile, 2001).
Gil Ferraro, SIU consultant for State Farm, a nationally recognized
insurance company that employs approximately 1450 SIUs across 26 regions of
the United States, argues that states need to have insurance fraud bureaus, pass
claims fraud legislation, and increase both criminal punishment and civil penalties
(Best’s Review, 2001). Two suggestions by consumers from the Coalition’s
(1997) survey were to reward good insurance-related behavior and punish people
who commit fraud; 87 percent of respondents from all four clusters combined
agreed that more cases of fraud should be prosecuted.
While fraud can be measured through analysis of arrests and prosecutions
by law enforcement and closed claims, anti-fraud efforts are not readily measured.
Because the antifraud effort is fragmented between insurance companies and law
enforcement, no protocol for investigating and prosecuting suspected fraud is
shared across all insurance companies and law enforcement entities. By
instituting a fraud crime bureau in Wisconsin which institutes and governs
antifraud policies and programs, efforts across the board will be synthesized and
allow a greater capacity for those policies and programs to be measured. It will
also allow for the generation of consumer awareness campaigns and a new fraud
Finnegan and Simpson (2000) note the general approach to fighting fraud
is not dependent upon the handling of any particular type fraud (worker’s
compensation, property/casualty, etc.). When fraud control is part of the initial
underwriting and claim adjustment procedures, a substantial savings will occur
due to the denial of bogus applications for coverage and denial of payment on
fraudulent claims. Fraud control can be achieved in this manner, argue Finnegan
and Simpson (2000), by utilizing best practices (fraud indicator recognition,
enhanced interviewing methods, accident damage analysis, and medical record
review), corporate support (rewards for fraud control practices, legal backing,
SIU, expert support, expert systems and databases, quality control approaches to
fraud control, and fraud measurement and monitoring); industry support
(information sharing across companies, industry wide association membership
and participation, educating the public, changing consumer attitudes toward fraud,
and research on fraud indicators, prevalence, costs, and remedies to assist in long
term control) ; and social support (fraud statutes, fraud bureaus, legal immunities,
and insurance tort reform).
Based on available research, Wisconsin should establish certain model
acts to curtail insurance fraud. These would include (1) a state fraud plan; (2) a
centralized anti-fraud effort; (3) pre-inspection of vehicles prior to the issuance of
insurance policies; and (4) consumer education. As the Coalition Against
Insurance Fraud is one of the premier agencies for fighting fraud, an insurance
crime bureau could be developed in Wisconsin that is patterned after the Model
Acts outlined by the Coalition. The Model Acts offer a complete pattern for
states to follow to create an insurance fraud bureau (see Appendix G for complete
descriptions of the Acts). As noted by Finnegan and Simpson (2000), until every
state has vigorous antifraud capacity, fraud will prosper as a crime for which there
is little or no punishment.
Research in the area of insurance fraud among companies in Wisconsin
will reveal the level that exists here. Companies need to combine antifraud efforts
and work together to establish a bureau based on the workings of other state crime
bureaus and best practices. It is hoped that light will be shed on better methods
for measuring fraud and the antifraud effort. Public and private sectors will need
to establish funding for the bureau and design a program that involves highly
trained investigators, analysts and dedicated prosecutors.
The creation of a fraud bureau is critical to the formation of a central
antifraud oversight in Wisconsin that functions to both educate and re-educate the
public to deter insurance crime. Legislators and insurance industry executives will
need to work together to achieve this end. Establishment of a fraud bureau in
Wisconsin opens the door to a collective effort by the private and public sectors to
reveal the hidden insurance crime problem, measure it, monitor its impact on
Wisconsin’s consumers, and reduce the potential negative effects insurance fraud
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