Auto insurers decry cavalier Bay State attitude on fraud

Add to Massachusetts' reputation as the car-theft capital of the US the title of auto insurance fraud champ (or chump). Insurance company spokesmen say many people here just don't seem to realize that not only is it a crime to cheat one's insurance company, it also puts an unnecessary burden on all car owners. The story is told of a Boston man who suffered the misfortune of having the front end of his car damaged in a traffic accident.

He promptly collected from his insurance company to pay for repairs. But rather than sending his car to an auto body repair shop, the man, who was apparently handy with tools, decided to do the work himself.

As an insurance investigator tells it, the man apparently went shopping on Boston streets for a car the same model and color as his own. He found one, stole it, then switched his damaged front end with that of the stolen car. He later dumped the stolen car across town for the police to find.

It is not unusual for stolen cars to be found damaged and investigators think that he was hoping that the unsuspecting owner of the car would simply call his insurance agent to have the front end repaired.

It didn't work out that way.

The car owner noticed immediately that the front end was a slightly different color from the rest of his car. He told investigators it wasn't his front end. A close examination of the parts placed on the car revealed a tiny piece of identification. It was traced.

The result was that rather than honoring his insurance claim, the insurance company had the man arrested and charged with auto theft and insurance fraud.

Investigators who made that case at Commonwealth Automobile Reinsurers (CAR) in Boston admit that it was one of the more elaborate insurance fraud/car theft scams they have yet seen in Massachusetts. But they note that these days a lot of people try to cook up new schemes to cheat an insurance company or otherwise try to beat the system. ``They are very inventive,'' says George M. Cobb, chief of the special fraud investigation unit at CAR.

Law-enforcement and insurance company officials estimate that one out of every five reports of car theft in Massachusetts is in fact an attempt to defraud an insurance company. Some 43,000 cars were reported stolen in the state last year, according to the Registry of Motor Vehicles.

In 1983, Massachusetts insurance companies paid auto-theft claims totaling almost $80 million. A year earlier, paid claims totaled $79 million.

``It is socially acceptable in Massachusetts to try to defraud your insurance company. I am absolutely convinced of that,'' says James K. Ronan of The Travelers Insurance Companies. ``I see this type of thing every day.''

Among the more common scams that Mr. Ronan and other insurance investigators see:

An owner arranges to have his car stolen and burned because he thinks he can get more for the car from the insurance company than from a trade-in allowance at a car dealership.

A person buys a junk car complete with title and registration at a salvage auction. The new owner then uses the ownership papers to open an insurance policy on the car. Since insurance agents in Massachusetts are not required physically to make sure there really is a car to be insured, the condition or existence of the car is sometimes not essential to receiving insurance coverage. Eventually the owner has the insured car crushed and shredded into scrap metal. Later, the so-called ``paper car'' is reported stolen to the police and a claim is filed with the insurance company.

``I think many people do not look upon filing a fraudulent insurance claim as involving any moral equation at all,'' says John Mooney of the Kemper Group insurance firm. ``Insurance companies are seen as fair game,'' he says.

Officials say some policyholders have developed the attitude that they have earned the right -- having faithfully made their insurance payments over the years -- to get their money back from the insurance company, even if it means staging a theft or break-in.

``The average law-abiding citizen in Massachusetts has thought that this isn't a crime,'' says Paul Corsetti of CAR.

But insurance fraud isn't just a local problem. Some insurance sources estimate that phony claims cost US insurance companies -- and ultimately policyholders -- between $3 billion and $4 billion a year.

Insurance officials say that some people apparently assume (mistakenly) that everyone cheats on income taxes and car insurance. Others, they say, figure that the companies are so large that they really won't notice or be significantly affected by just one fraudulent claim.

But each year insurance companies in Massachusetts must grapple with thousands of fraudulent claims. As a result, every insured driver in the state pays more for theft coverage.

``Unfortunately, these incidents of undetected fraud eventually wind up in the rates. It does cost people more for their comprehensive coverage,'' Mr. Mooney says.

Most Massachusetts insurance companies are fighting back against those who are trying to take advantage of the system.

In 1975-76, executives at The Kemper Group noticed that an unusually large number of gas-guzzling cars were being stolen and then set ablaze. It was happening at a time when gas prices were sky-rocketing and the trade-in value of gas guzzlers had plummeted. In response, Kemper established a special investigative unit (SIU) to probe questionable claims. During the first two years of active investigating, the number of theft claims to Kemper companies fell by 57 percent.

``We are saving about a half-million dollars a year in loss payments because of the SIU,'' says Mooney. He notes that Kemper, one of the larger insurance firms in the state, writing roughly 9 percent of insurance policies, was the first insurance company to establish an SIU.

Today, every major insurance firm has an active SIU of its own.

Travelers Insurance Companies, writers of 6 percent of the state's policies, has an SIU that is credited with uncovering 162 fraudulent claims in 1984, saving the firm $618,000 in loss payments.

``It comes out that for every dollar spent [to staff and run the SIU], Travelers ends up saving four dollars,'' Ronan says.

``The basic philosophy,'' he says, ``is to identify phony claims and simply not pay them.''

He adds: ``I have a claim on my desk now that I know just did not exist. The car had been totaled out by Allstate in December 1983, but the person had enough papers [indicating continued ownership of the auto] to sell. They had the papers insured by Travelers, and a week after they opened the policy they claimed the car was stolen.''

``I've had claims where someone walked into the agent, opened a policy and turned around in minutes and said, `Wow, my car has just been stolen.' ''

Ronan laughs: ``And that's happened more than once.''

The insurance investigator says that such claims are rarely paid, but he stresses, ``It could happen, right? But you can't just say, `I don't believe you.' You have to go out and investigate.''

Kemper's John Mooney says, ``There are an awful lot of fraudulent claims that go through that probably look as smooth as apple pie.''

Law-enforcement officials say that sometimes the insurance companies actually create problems for themselves by playing into the hands of potential insurance cheats.

When an insurance company ends up with a ``totaled'' car in an accident claim, rather than having the car immediately scrapped and turning in its title to the state, the car is usually taken to a salvage auction where it is sold along with its title to the highest bidder. Many insurance companies continue to do this despite possible future problems with ``paper cars.'' They do it because they can recover more money by putting cars up in a salvage auction than they could if they simply had it scrapped themselves.

Some insurance executives say that what is needed to put an end to paper-car scams in Massachusetts is the establishment of a regulation that would require the titles of wrecked or abandoned cars to be stamped ``salvage.'' This, they say, would be a tip-off to insurance agents.

Such regulations already exist in New York, Illinois, and other states. ``We are one of the few states that doesn't have a salvage title law,'' says Herbert Burr of the Registry of Motor Vehicles. He says experience in others states proves that such laws ``cut down on a lot of paper cars. All the states around us have salvage title laws.''

Law-enforcement officials say that paper-car scams could also be prevented simply by requiring insurance agents physically to inspect the cars they insure to make sure they really exist.

While they may turn up enough information to deny a fraudulent claim, insurance investigators say they rarely uncover enough evidence to put an insurance cheat behind bars.

``Most people who get caught just kind of shrug and go away,'' Ronan says. ``We feel we are hurting them in the pocketbook; we are not going to pay that claim.''

Mooney says, ``Fraud is a very difficult thing to prove. The courts are overburdened with crimes against the person, and stolen car cases receive very, very low priority.''