Don't get stomped by insurance fraud
Daniel Jimenez • Bankrate.com

If you think that insurance fraud is just about dishonest policyholders filing false claims, think again. You may already have bought a policy from a fraudulent seller. If you have, you won't realize it until the time comes to collect on that policy.

Fraudmeisters prey on individuals who have trouble getting insured or who can't afford the high premiums charged by some companies. Insurance investigators began running across more incidents of health insurance fraud when rates went up a few years ago. For example, an insurance company would turn down an applicant because of a pre-existing condition, but a disreputable salesman would approve the application to sell a worthless policy.

So what happens if you've been sold a bogus policy? That depends on your situation. The 1992 Los Angeles riots were a prime example of a worst-case scenario. Many Asian-American business owners tried to collect on policies after their shops were burned during the riots. They soon discovered that they'd been had by a group of crooked offshore insurance companies.

The victims eventually won a class action suit, but they've been unable to collect on their losses, says Mike Diegel, communications director for the Coalition Against Insurance Fraud in Washington. "Attorneys have been going after those companies by attacking their assets. The problem is that you can't find their assets. It's difficult to trace the assets because those companies keep moving the money around and changing their name."

Things are often easier if you've been victimized by a fraudulent agent or broker who's employed by a legitimate insurance seller, says Jim Spiller, an administrative assistant with the National Insurance Crime Bureau in Palos Hills, Ill. "Usually, the insurance companies are sympathetic when a client has been defrauded. Most insurance companies will honor that policy. The consumer himself will get some kind of recourse -- unless it's some type of offshore company that is not regulated by any state."

I've been cheated, been mistreated

Agent fraud occurs when a consumer gives money to an insurance agent and receives nothing in return or receives a product that they never requested. Unauthorized insurance fraud takes place when unlicensed companies sell insurance policies. Diegel says agent/broker fraud makes up a significant part of the $120 billion in insurance fraud that takes place every year.

"Agent fraud is definitely a problem. That is not to imply that all agents are crooked, but there have been cases where agents pocketed premiums instead of sending them to their company. There have been other times when agents forged policy applications and collected money that way. Agents have borrowed money from a client's account or filed a phony claim with a company while using their customer's information. All those scams are intended to drain the customer's account in one way or another."

Prospective policy buyers can protect themselves from fraud by checking with their state insurance department to see whether an agent/broker is licensed and what their claims-payment record has been.

But a broker or agent is not legit simply because he is licensed. In one case, a father and son team and two licensed insurance brokers pleaded guilty to fraud charges after selling phony commercial policies to at least 50 companies in New York City. Authorities accused Dean Sanders and his son, Scott, of taking an estimated $30 million over a period of six years. The pair even worked their scams from behind bars, authorities said, as one or the other was imprisoned on unrelated charges during those six years.

Diegel warns clients never to pay cash or write payment checks made out to an agent rather than a company. And never sign blank insurance forms.

If you're buying insurance products online, Spiller recommends that you check to see whether the company is registered with the Better Business Bureau. You can also find out how an insurer's creditworthiness is rated by agencies such as Standard & Poor's, A.M. Best Co. or Moody's Investors Service.

Fraud victims can fight back by contacting their state insurance department's fraud unit or consumer affairs office. But in the end, common sense may still be your best defense against being tricked. "If the deal looks too good to be true, then watch out," Diegel says.

-- Posted: Oct. 1, 1999