Suggested legislation

The Coalition has crafted several model fraud laws covering the crime of insurance fraud, creating a state insurance fraud bureau, the pre-inspection of automobiles and an anti-runner model.

But, there are additional creative statutes to address specific aspects of insurance fraud in state laws and regulations - actions that may not fit into any of the Coalition's models. Below are a few we encourage legislators and the fraud-fighting community to consider:

Automobile Insurance Fraud

Defining staged crashes as a crime

There are several elements of staging an automobile crash to commit insurance fraud. One element deals with the runners and cappers that set up the crash. That is dealt in the Coalition's anti-runner model law. The other main element is targeting the staging of the crash itself. Florida's law deals with that - criminalizing the crash itself. Florida also has an anti-runner statute so the two laws can be viewed as bookends in attacking the organized stage crash rings.

The Florida law clearly defines the staging of the crash as a crime. The Coalition has noted that there have been a number of instances where innocent victims are seriously injured or have died due to a staged crash. The Florida law believes that those involved in staging a crash need to be punished by a specific law.

Decertifying provider from receiving payment from auto insurance system

The Coalition has long held that providers who use their state licenses to commit insurance fraud should face license suspension and revocation. It is a key element of the Coalition's model insurance fraud law.

New York has taken the lead in those states that have no-fault automobile insurance laws to target health providers who commit automobile insurance fraud. It has established a procedure to decertify providers caught committing from obtaining benefits from the no-fault insurance system, New York clearly follows the intent of the Coalition's view on license review.

The New York Department of Financial Services also has crafted a regulation that would define how the state law would be implemented. Both the law and the regulation work in tandem and if the state enforces both should help combating the providers who commit automobile insurance fraud.

Automobile Rate Evasion

More states are starting to look at the problem of automobile rate evasion — out-of-state drivers illicitly registering and insuring vehicles in states and jurisdictions with lower premiums.

Consumers and businesses use out-of-state addresses to reduce their auto-insurance premiums. Insurance costs are lower in those jurisdictions. However that doesn’t reduce the insurance risk where the vehicle is garaged or driven. It adds costs to honest consumers and businesses who insure their vehicles in their home states.

States have looked at three distinct solutions:

  1. North Carolina several years ago began requiring proof of residence before an insurer can issue coverage for an auto. Drivers living in higher-premium states such as New York had registered and insured vehicles in North Carolina. Amendments in 2016 strengthened the law, targeting businesses that think they got a bargain by using false North Carolina addresses to insure their commercial vehicles.
  2. New Jersey is the first state to make it a specific crime to use an out-of-state address to register and insure an auto. New Jersey has relatively high auto premiums, thus tempting drivers to seek relief in other states. New York has failed to pass similar legislation in recent years, but there is hope New York will join New Jersey with a new law. Both the New Jersey law and New York legislation exempt a) so-called “snow birds” who can show proof of residency elsewhere; and b) out-of-state students who attend school in the state.
  3. Maryland is looking at giving insurers the right to cancel auto coverage if the insured is an out-of-state driver. One auto insurer discovered several drivers who live and garage autos in a state where the insurer doesn’t even write coverage. Seems the drivers used Maryland addresses though there was no evidence they lived there. A secondary issue is whether the insurer can deny claims by non-resident motorists.

These are three examples of how states are looking at this issue. Auto insurance clearly follows the concept of spreading the risk. If all drivers use their real address to buy auto insurance, then the risk should be spread fairly and equitably. Stopping drivers from using out-of-state addresses helps keep the auto-insurance system fair for everyone. Policymakers should pursue legislation to discourage auto rate evasion.

Airbag theft and fraud

The Coalition worked closely with the National Conference of Insurance Legislators in drafting a model for NCOIL on airbag theft and fraud. Rhode Island was the first state to enact the NCOIL model.

Several states already have laws that criminalize the theft of an airbag or the use of a phony airbag in a repair of a vehicle. The NCOIL model is the first model law that looks at all the issues of airbag theft and fraud. The key elements:

• Requires a repair shop to have a record of where they purchased a replacement airbag for repair.

• Makes it a crime to use a phony airbag or the impression that a viable replacement airbag was used in a repair.

• Makes it a crime to sell or market a stolen airbag or a defective airbag that could be used in a repair.

• Requires automobile crash reports to have a notation of whether an airbag was deployed in a crash.

In addition to the issues above, the problem of manufacturing and marketing of counterfeit airbags made with the name, logo and look of bags made by legitimate carmakers came to light in 2012. In a briefing at the Coalition's annual membership meeting, a federal prosecutor outlined a case against a Chinese national who manufactured and marketed counterfeit airbags in the U.S. for use in fraudulently repairing vehicles. Potentially, the amount of counterfeit airbags is widespread and goes far beyond the Tennessee federal prosecutor’s jurisdiction.

Airbags are here to protect consumers from serious injury or death. Consumers should correctly expect that airbags will protect them in a crash. Counterfeit or non-functional airbags violate that expectation.

Counterfeit airbag fraud also often is an expensive insurance scheme. Dishonest repair shops, for example, may charge insurers $1,000 or more for installing a fake airbag bought for $100 or less from black-market sellers.

States now are seeking to expand their laws targeting airbag theft and fraud to include counterfeit airbags. Creating and marketing a counterfeit bag thus should be a specific crime, with stringent penalties.

Connecticut and New York have enacted such laws recently.

Shady Contractors

One of the growing fraud trends the Coalition has noted over the past several years has been the impact of shady contractors, especially roofing contractors that have preyed on innocent consumers who had damages to property because of natural disasters like hurricanes or tornadoes.

These shady contractors promise fast and cost-effective repair that usually is neither. And, in some cases convinces property owners that unnecessary repairs are needed on their roofs. The homeowner in turn seeks the help of the property insurer to pay for the shoddy or phony repairs.

Insurers, consumer groups and anti-fraud groups have partnered in the last couple of legislative sessions seeking stronger state laws targeting the shady contractors. The Coalition tracked no fewer than six states enacting stricter laws in 2012 and expect more states to tighten their efforts in future years.

There is no one model that the laws have tracked but the better ones target several key elements:

• Allowing the consumer to rescind a contract from a contractor if the property insurer denies part or the entire repair claim.

• Requires a warning on a contractor's contract telling the consumer that the contract could be rescinded if the insurer denies part or the entire repair claim.

• Sets criminal sanctions against the contractor who offers an inducement (rebating the insured's deductible) to get the consumer to sign a contract.

• Sets criminal sanctions against the contractor who acts as an intermediary between the insured and the insurer (acting as an unlicensed adjuster).

Colorado, Indiana, Maryland and Minnesota have good statutes addressing this issue.

Venue law for prosecuting fraud cases

Few states clearly define the venues where prosecutors can try insurance-fraud cases, according to Coalition research. Maryland is only the 4th state to do so.

The Maryland law, which takes effect in October 2014, tracks a New Hampshire law that took effect in January 2014.

Both states needed to clarify cross-border issues with insurance cases. Mobile devices such as cellphones, iPads and laptops make it hard to prove in which state a suspicious claim was filed. This is equally true for proving in which county a suspect filed the claim.

A separate legal question: Was the crime committed where the claim document was mailed or where the insurer received it?

Confusion over where the suspected fraud happens could let fraudsters be released on technicalities. Prosecutors also are less likely to take such cases unless they know for sure that they have jurisdiction to prosecute.

The solution in Maryland and New Hampshire was fairly clearcut: Define all variables that make the suspected crime fall under the state’s jurisdiction. Both states thus give prosecutors venues for trying fraud cases if the:

  • insurance loss occurred;
  • insurance policy provides coverage;
  • insurer or its agent received the false statement;
  • defendant lives in the state; or
  • stolen insurance money was received.

Prosecutors in those states now have have one less headache of a potentially messy procedural issue that detracts from the heart of the matter — proving if the fraud suspect is guilty or innocent.

Virginia enacted a venue law several years ago. The goal mainly was to help local prosecutors determine if their jurisdiction is the right venue for a given fraud case.

Whether a state needs a fraud-specific venue law is an individual decision. But with mobile devices increasingly muddying the waters, the anti-fraud community would be wise to push for fraud-centric venue laws. The Maryland and New Hampshire laws are well-suited models.

Workers Compensation Premium Fraud

The anti-fraud community has long held that employer schemes designed to avoid paying full state-required premiums are at least as damaging to the workers compensation system as fake-injury scams by employees.

A single premium-avoidance scam can steal hundreds of thousands of dollars. Workers also are left exposed if they’re injured on the job because the dishonest employer hasn’t purchased state-required workers compensation coverage for them. Competitors also are placed a disadvantage because the crooked employer can use the premium savings to illicitly underbid for contracts.

States vary in how they deal with premium scams. Some states clearly define premium cons as fraud, while others view it differently. For instance, one state fraud director privately says that state judges have consistently ruled that businesses only commit a misdemeanor of lying on an insurance application when submitting phony information to lower their workers comp premiums. The state courts refuse to consider the amount of premium that should’ve been paid as a fraud.

States may need legislative fixes that ensure a business that misclassifies its workforce to reduce premiums should face the full brunt of fraud penalties. A recent grand jury report provides one blueprint.

A New York grand jury recommends that the state legislature target widespread premium fraud in the state. Unpaid workers comp premiums are New York’s largest source of comp fraud losses, the report says. Misclassifying construction workers in New York City alone cost $500 million in 2011.

The report deals only with New York’s lax laws on premium fraud. The main proposals are:

  • increase penalties to ensure sentences reflect the fraud scheme’s magnitude;
  • increase transparency by reforming the application and audit processes;
  • provide more information to fraud investigators and prosecutors, including creating databases that will help confirm a business's workforce information; and 
  • better educate employees and public about the workers-comp system and its great value.

Though the recommendations are New York-specific, they might apply to other states that have the same problems with premium scams.

Regulating check-cashing facilities

While workers compensation premium fraud has been around a long time, a relatively new twist involves paying off-the-books employees through check-cashing stores.

Working in collusion with employers, the check-cashing facilities help to hide payroll from insurers and auditors, usually for a small percentage of weekly payroll.

Found mostly in the construction industry, the scam helps businesses avoid paying full price for state-mandated workers comp coverage. Contractors make deals with check-cashing businesses, sometimes a convenience store, and forward a check for the total amount of payroll, along with details for each worker’s wages. Workers show up at the store, present ID and are paid in cash.

The schemes deprive employees of vital workers-compensation protection when injured on the job. The scams also evade state and federal laws that protect workers’ wages and contributions to Social Security. States and the federal government also lose tax revenue.

One response is to require better record keeping by check-cashing stores.
Florida recently enacted a law to require business to show proof of valid workers compensation coverage before the check-cashing facility can pay employees. Florida also enacted a statewide database of check transactions.

The Florida laws deal solely with check-cashing facilities. They are an important though partial step. Insurers and states also should develop comprehensive wide-ranging solutions that deal with all aspects of costly premium schemes.

Insurance Agent fraud

Louisiana recently enacted law expands the definition of insurance fraud to target cheaters who impersonate insurer reps to steer crash victims to shady providers for bogus injury treatment.

This recommendation responds to a growing problem: Definitions of insurance fraud usually are broad and encompass myriad activities tied to an insurance policy or claim. Still, there are gaps in what can constitute insurance fraud.

Members of fraud rings, for example, often pose as insurer employees or public adjusters. They steer auto crash victims or claimants to corrupt clinics for purported injury treatment. The treatment usually is inflated or worthless. Often it’s never even given but lavishly billed to auto insurers.

An impersonation is the scheme’s predicate act and should fall under a state’s broad insurance-fraud law. Right now that con isn’t generally recognized as a felony insurance fraud.

Last year Louisiana decided that impersonating insurance reps to steer claimants into cons should be treated the same as making phony claims. A new law imposes the same felony penalties as bogus claims. It works in tandem with state insurance-fraud laws, anti-runner laws or anti-solicitation measures. The Coalition recommends that anti-fraud advocates and policymakers consider pursuing this kind of law.