A million-dollar painting stolen from the trunk of an insured's car—not your average insurance claim.

It started normally enough, as Spencer Houldin, president of Ericson Insurance Advisors in New York City, recalls the case that took place 20 years ago. The insured informed Houldin he would be transporting his $1.2 million painting from his primary residence to his second home and wanted to confirm that the painting was covered.

“That was fine," Houldin says. “But then we received a phone call from him shortly afterward saying that his painting had been stolen—and I can't even make this up—he told us someone broke into the trunk and took his painting while he was stopping by at a gentleman's club."

Houldin knew the reported theft was a red flag for insurance fraud. “We immediately informed the insurance carrier," he says, and its investigative unit went into high gear. A background check uncovered the insured's financial troubles. A private eye stake-out, a hasty flight to the U.K. by the insured and an arrest transpired. It turned out that the insured had, in fact, staged the heist.

Insurance fraud is often not as flashy as stolen paintings and film noir detective-style investigations—but fraud is more common than you may think. Fraud occurs in about 10% of property-casualty insurance losses, according to the Coalition Against Insurance Fraud. And p-c fraud accounts for about $30 billion in theft each year, according to the Insurance Information Institute.

In many cases, agents are the first line of defense against potential fraudsters.

What role do independent agents play in preventing insurance fraud? And what are the consequences if they don't?

One Bad Apple

Insurance fraud takes a myriad of forms that agents may encounter.

While clear, outright fraud is “where a client may come in and take out a policy because they plan to stage an accident or submit a fraudulent claim, the bigger problem is premium avoidance or premium leakage," explains Dan Donovan, vice president of customer success at Shift Technology. “That's when carriers aren't charging enough premium to cover the true risk, because they're given false information by an applicant to get a better rate."

One key concern for independent agents should be “cyber scams and particularly identity theft," says Matthew Smith, executive director of the Coalition Against Insurance Fraud. “Especially in the online world and perhaps not meeting a person face to face, you may not know specifically who the person is."

The Federal Trade Commission received a 113% increase in identity theft complaints in 2020. “It's a huge issue," Smith says, “and if we have all that identity theft going on we'd be pretty ignorant to think that the world of insurance isn't at risk of fraudsters using those ID thefts to secure fake policies."

Fraud can occur from all directions of the insurance transaction. Doug Heller, senior adviser to the Consumer Federation of America, emphasizes that agents have an important role in preventing fraud committed by insurance companies.

“One thing we are concerned about is the equal treatment of policyholders by insurance companies," he says. “As America has grappled with institutional racism, we've been rightly focused over the last year on instances in which policyholders from communities of color get lower quality service, unfairly denied claims or get put into non-preferred companies."

“Agents can see this," Heller continues. “Agents know which of their clients get a full claim paid and which ones have to fight for every last dollar. When people don't get the full value of their contract, that's fraud and the agent should stand up for their aggrieved policyholder, talk to their carrier and ask why they're seeing different trends."

Unfortunately, insurance fraud may even be committed by an agent. “The vast, vast majority of agents would never ever contemplate this, but premium thefts by agents are among the most common insurance fraud schemes in America," Heller says. “It's important to keep an eye on accounting and make sure premiums are making it all the way to the carrier."

One enormous source of fraud is service providers, such as auto body shops or home repair contractors, according to Fred Wharton, president and CEO of North American Training Group, Big “I" fraud training partner. “Most of your clients may be good—although occasionally you do get a bad apple—but it's service provider fraud that runs up the claims costs," he says.

Repairs after car accidents are often the perfect opportunity for fraudsters. “Body shops have been known to take out perfectly good airbags, place a deployed airbag in there from a similar model, and when the adjuster gets there it's a $10,000 payout," Wharton says. “Or, in horrible cases, the airbags did blow, and the shop stuffs it back in, superglues it together, and sends the customer on their way. That's when deaths occur."

“Those fraudsters aren't thinking of safety," Wharton adds. “They're just lining their pockets with money."

Spider Senses

How can agents prevent insurance fraud? Most of it comes down to common sense and intuition.

“When I was an agent, we used to call it 'spider senses'," Delaware Insurance Commissioner Trinidad Navarro, chair of the National Association of Insurance Commissioners' National Antifraud Task Force. “If something seems too good to be true, or if you're presented with information that doesn't sound quite right, you should dig deeper."

Here are six actions agents can take to fight fraud:

1) Watch trends. “A knowledge of claim trends is important," Houldin says. “We have a pretty good idea that people have property claims every seven years on average. When someone has four claims in a seven-year period, you have to think about why that would be."

Agents should maintain a good read of their surroundings to determine patterns, especially with service providers, Wharton warns. “They need to get an idea of what body shops have given the best customer service and honest bills versus which ones are always inflated 25% over every other repair estimate."

2) Be wary of unusual knowledge or focus. “If someone comes in and knows exactly what they want, that's a flag and a sign to start asking some more questions," Wharton says.

Additionally, agents should be concerned with unusual interest in “payoffs if the worst-case scenario was to happen," says Arinze Ifekauche, director of communications at the Coalition Against Insurance Fraud. “With all the reporting we do about insurance fraud cases, in many cases defendants asked their insurer repeated and pointed questions: 'How do I get paid if my building catches on fire?' or 'How long before an investigation is stopped on a life insurance policy?'"

3) Verify information. “There are many tools agents have access to, either through their carriers or publicly available information," Donovan says.

“Doublecheck that the car or the house exists," Wharton agrees. If something has begun to feel amiss, agents should dig deeper with follow-up questions. Even simple ones such as how busy the client's neighborhood's intersections are may cause a potential fraudster to “panic or draw a blank, especially if they were told to go in there by the head of a fraud ring and ask for a specific coverage from a specific carrier," Wharton says.

And educate clients to go the extra step to protect from fraud. “Make sure they know to take pictures of the car accident damage before it goes to the body shop," Wharton continues. “That way, the carrier will know if the shop's bill doesn't reflect the real damage."

4) Be clear about accuracy. For Commissioner Navarro, “the most important thing agents can do in fighting insurance fraud is making sure the information they collect is complete and accurate, especially during busy times."

“If a customer is asking questions that suggest they're willing to be flexible—such as, 'Would I get a better rate if I used a different address?' that should raise an eyebrow," Heller says. “They might just be considering moving. But you should start to pay extra attention there."

“It should be made very clear by agents to consumers that they need to be accurate or they risk their policy being canceled," Heller continues. “There should be no fudging. Agents have to take responsibility to prevent that."

5) Have an anti-fraud plan. “What I hear repeatedly is that agencies relied on the insurance company to have a plan," Smith says. “I spent 35 years in the courtroom litigating insurance claims. Every independent agent should be prepared. If they are sued over a tragic loss or fraudulent claim and are asked whether they have a fraud plan in place—if they say 'no,' they have opened the door for their own liability."

6) Implement training. States have varying requirements for fraud training, frequency and who should receive it. Even if regular training is not yet required in an agency's state, Wharton says, it's still crucial.

“The only way to get in front of these fraudsters is to have agency staff understand what fraud looks like," he says. “The agent's role is to really know what's going on and to be aware of their surroundings."

Make the Call

What if you see a potential red flag? First, it doesn't necessarily mean you've encountered fraud. “A client driving 50 miles away from where they live to visit your agency may be an indicator," Wharton says. “But if you dig a little deeper you may simply find that their cousin gave you an outstanding recommendation."

If you are suspicious, take it to carrier. “As agents, it's our job to alert the insurance company to do a little deeper digging," Houldin says. “They have the expertise and the resources to investigate."

“If it doesn't feel right, report it," Smith agrees. “Affirmatively take the steps of referring the matter to the insurance carrier, or where appropriate, directly report it to the fraud bureau within your state's department of insurance."

However, “one of the biggest mistakes we see agents make is assuming, even though they are state licensed, that it's the duty of the insurance company to investigate and report the fraud," Smith says.

Smith explains one instance in Virginia in 2012 when “a stepfather took out a $500,000 life insurance policy on his five-year-old stepson. Given the economic situation of the stepfather and the brevity of his relationship with the child, there were all sorts of indicators on the policy," he says. “The tragic result is the stepfather murdered the boy and attempted to collect the insurance."

“When the case went to litigation, the agent who wrote the policy admitted that they thought it was suspicious but that their job was to just take the application and let the insurance carrier decide," Smith continues. “The carrier's response was that it relies on agents to determine whether it's good business. You ended up with the agent blaming the company, the company blaming the agent, and a five-year-old dead."

AnneMarie McPherson is IA news editor.