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The New York Insurance Fraud Ring:
How It All Began

by Guy E. Burnette, Jr., Esquire

Contents


The Story of John Doe

October 5, 1989 began like any other day in the office: phone calls to return, mail to review, dictation of letters and pleadings, conferences with clients and office staff, preparation for an upcoming deposition and the usual miscellaneous activities of a rare day spent in the office. A phone call that afternoon was the only notable exception to the daily routine. At the time, it looked to be a slightly different kind of file assignment with the potential to become interesting. In retrospect, I had no inkling of what was to come.

The call came that afternoon from an insurance company client with a Tampa regional headquarters situated in my office building. The convenience of our location was often a useful arrangement which enabled us to meet to discuss new file assignments on short notice. When the client called that afternoon, however, it was not a call from the seventh floor. It was a call from the home office and the person making that call was the special investigations unit supervisor for the company. This time there was no claim and no insured to discuss. Instead, I was informed this was an internal matter.

I could tell the SIU supervisor was troubled by this call. The words did not come easily as she began with the request that our discussion be held in the strictest possible confidence. I was told that a general adjuster had recently retired from the company and was living on the east coast of Florida. Shortly before his retirement, he had transferred to the Tampa office from New York where he had worked for the company more than twenty years. He was one of the most respected general adjusters with the company at the time of his retirement, renowned for his claims handling abilities. However, despite his sterling reputation within the company, there had been some disturbing rumors in recent years. There had been comments from a variety of sources about the general adjuster being "dirty". When those rumors first surfaced, they were dismissed and disregarded. His record with the company was impeccable. The sources of the rumors were themselves questionable: public adjusters whose claims were not settled the way they wanted and contractors whose repair bids had been rejected in favor of another contractor. It was nothing to really be taken seriously and so it was not.

He was only in Florida a few months before he retired and I never even had the chance to meet him. After his recent retirement, the troubling rumors had intensified. Then, an anonymous phone call came in to the company. A member of a New York area country club had heard a fellow member brag about "ripping off" the company in a recent claim. The suspect member was identified and a search of the company's claim records revealed a $70,000 claim had been paid. It was a claim with enough red flags to start a parade. The claim had been adjusted by none other than John Doe. Now, almost six months after his retirement from the company, it was finally decided to launch a full scale investigation of the situation.

A preliminary investigation had already begun before my involvement. A number of the claim files handled by John Doe were reviewed by the siu supervisor and another general adjuster with the company. Those claim files showed a disturbing pattern of inordinately high payments for relatively minor losses and questionable documentation of the damages for which claim payments were made. Several of the claim files were strikingly similar in the type of loss and scope of damages claimed. Some of the same public adjusters, contractors and salvors appeared together in a number of the claim files. On the surface, however, nothing was shown to concretely prove any fraud in the handling of the claim files. Still, in the face of the growing accusations against John Doe there was certainly nothing in those files to allay the concerns of the company. This led to the decision to retain my firm to direct the investigation forward. I could never have imagined where it would lead.

The initial assignment was concise: hire a private investigator to check out his assets and lifestyle to determine if there could be anything to the rumors. He had always lived a modest lifestyle while employed by the company. He drove a late-model economy car, dressed simply and showed no outward signs of living beyond his means. When he retired, he was making $45,000 a year with the company and his wife was a homemaker with no earnings of her own. He sometimes spoke about the stock market and had recently inherited some money from his father. In all of this, however, there was nothing to indicate more than a basic middle-class lifestyle trying to make ends meet. If there was anything more to this picture, it was behind the scenes. We were asked to look behind the scenes and find out if there was any reason to believe the rumors could be true.

Because of the sensitive nature of the investigation, I was asked to set up my file under the name "John Doe". I was instructed to report directly to the home office supervisor of the special investigations unit in plain envelopes marked "personal and confidential". I was told to report to nobody else in the company with my findings and to ensure the investigation was conducted as discreetly as possible. It seemed almost like a spy novel with all the attention to secrecy, but I felt I would be able to wrap it up in a few weeks and put an end to the persistent rumors about a "dirty" adjuster in the ranks. Little did I know.

The Midas Touch

A few days later I met in my office with a private investigator. He was a respected and trusted investigator who had worked for our firm on a number of prior occasions. I explained the situation to him and emphasized the need for a discreet investigation. I told him to travel to the city where John Doe was now living and check out his lifestyle. I told him to conduct a courthouse records check of any property holdings in the name of John Doe, along with any other records which might shed some light on his lifestyle. The report was to be sent to my direct attention marked "personal and confidential". Arrangements were made for the payment of his retainer and I sent him out to do his investigation. What he found was more than I could imagine.

The report came about a week later. The public records of the county where John Doe lived showed he owned twenty-two (22) properties in his own name, including an assortment of residential properties, commercial properties and even some oceanfront property. The total tax assessed value of the properties was a stunning one million two hundred eighty-two thousand four hundred sixty-five dollars ($1,282,465.00). Most of the properties were owned free and clear. If these were the holdings of a $45,000 a year adjuster, he must have had the Midas Touch.

A Closer Look

With this preliminary information, it was clearly time for a closer look. After advising the client of these findings, we expanded the scope of the investigation. We instructed the private investigator to conduct a statewide property search and a courthouse check in the surrounding five (5) counties, plus a search for any corporations or businesses John Doe was associated with. We included his family members in the investigation to be conducted.

It was soon discovered that John Doe had a portfolio of real estate spread across the state of Florida with a total tax assessed value of over three million dollars. The fair market value of those properties would probably be more than four million dollars. We later learned that John Doe owned other property in New York, as well. Virtually all of the properties had been acquired in the prior five (5) years at a time when he was ostensibly earning about $45,000 annually.

It was subsequently learned John Doe had not reported any of those properties on his tax returns as sources of rental income, tax write-offs or interest deductions, although virtually all of his holdings were commercial properties and rental dwellings.

A credit report disclosed that John Doe had an excellent credit payment history and a zero balance with all his creditors. Almost none of the real properties had a mortgage recorded against them.
A check of the corporate records with the Florida secretary of state revealed that John Doe was a majority shareholder or officer of four (4) separate corporations in Florida. He was similarly involved in another corporation in the state of New York. All of the corporations were apparently involved in the construction/restoration business.

Further examination of the property records showed that John Doe also owned an interest in a number of additional properties with others, including his wife, some of which had recently been sold or conveyed to third parties. At least one such property had been sold to another adjuster with the same company. The investigation disclosed the other adjuster owned at least six parcels of property in his own name, situated in close proximity to the properties owned by John Doe.

Many of the properties owned by John Doe were titled jointly with his wife. One of them, tax appraised at $159,000.00, had been recently deeded to his daughter. There was no mortgage on this property. There was also no mortgage on the property where John Doe lived with his wife. Interestingly, this property was appraised at only $46,520.00 and was one of the most modest holdings in his portfolio. It seemed he wanted to maintain the outward appearance of a middle-class lifestyle at his personal residence.

A review of the probate records in New York indicated John Doe had inherited some money from his father's estate a few years before. However, his inheritance was less than $100,000 and could not begin to explain his real estate holdings in Florida and New York.

As a result of this information, we recommended a full-scale investigation of prior claim files handled by John Doe. This time, they would be closely scrutinized for any possible irregularities of any kind. There would no longer be any "benefit of the doubt" in reviewing them. Among the first files reviewed was a claim John Doe had handled involving his own daughter. It had been set up under her married name and involved a relatively minor water leak from a washing machine in the garage. However, the total claim payments for this loss were in excess of $16,000. A number of other claims handled by John Doe were found to be grossly inflated, many of them strikingly similar losses filed under different insureds' names. Remarkably, the exact same photograph of a water damaged wall appeared in several different files! The deeper we dug, the more fraud we uncovered and we had only begun to scratch the surface. The united states postal inspector's office in New York became involved and a copy of our file was turned over pursuant to subpoena. It would eventually become the largest insurance fraud investigation in u.s. history.

In the spring of 1992, a New York federal grand jury indicted 19 individuals, including 13 insureds, two public adjusting firms and four claims adjusters on charges of fraud, theft and conspiracy involving several hundred claims files totaling millions of dollars in claim payments. John Doe was named in the first of the indictments resulting from this investigation. Many more were to follow.

Shortly after the indictment naming John Doe, the Manhattan district attorney's office secured an indictment naming 45 more individuals in a fraud and arson ring, including a number of public adjusting firms, company adjusters and salvors. This indictment was merely a sequel to the first one naming John Doe, an investigation growing ever larger with no end in sight.

Other carriers started their own investigations after learning of the John Doe case. Their investigations uncovered the same pattern of fraud affecting dozens of companies and hundreds of millions of dollars in bogus claim payments. More indictments followed as the investigations expanded. To date, over 100 defendants have entered pleas to charges of mail fraud, tax evasion and related charges involving insureds, public adjusters, salvors, independent adjusters, contractors and company adjusters from over two dozen insurance companies. The total amount of fraud proved in those cases is in excess of 750 million dollars and the numbers are still climbing.

John Doe entered pleas of guilty to charges of mail fraud (two counts) and income tax evasion. He then cooperated in the ongoing investigation. He was subsequently named in a civil rico case filed in New York federal court by his former employer, seeking treble damages and punitive damages. The case is still pending at the time of this writing. Five other adjusters with the company have been indicted and have entered guilty pleas to similar charges.

The Difficult Questions

Even as the criminal investigation continues and the civil rico case against John Doe moves toward a trial date, many troubling questions comes to mind: how could this happen? What could lead respected professionals to sacrifice their careers, their reputations and their freedom for the love of money? How could such a massive fraud ring operate for so many years without detection? What can be done to prevent this in the future?

Many of these questions are difficult, if not impossible to answer. The human element in all of this remains a major part of the picture. The insurance industry is no more immune to fraud and wrongdoing than any other field. Experience has shown the lure of easy money is a temptation which cannot be easily resisted by some. The billions of dollars in claim payments every year by the insurance industry represent staggering sums of money to the average person. When willie sutton was asked why he robbed banks, he explained "that's where all the money is." In simplistic terms, it might be observed this happened because "that's where all the money is." However, that only begins to tell the story.

Early in the investigation, John Doe was confronted with the facts. He sat silently for several minutes before responding. When he did, he only said "I was overworked". Few insurance professionals feel they are adequately compensated for the long hours and hard work. Stress and pressures abound, coming from all sides. Management demands claim files be settled and closed as soon as possible. Insureds, public adjusters and claimants' attorneys add their demands amid allegations of bad faith claims handling. Insurance departments and regulatory agencies make their demands with threats of administrative penalties. All of this is faced by the claims professional daily in trying to get the job done. In this environment, every claims professional feels overworked and underpaid. The vast majority understand this comes with the territory and they learn to deal with it. A select few, unfortunately, take it upon themselves to alleviate the situation. This is nothing unique to the insurance industry and will always be a challenge to the integrity of the profession.

There are inherent flaws in the system which not only provided the temptation for fraud, but made it possible. The sheer volume of claim files makes it impossible to monitor the handling of each and every one. A claim file in the hands of a senior general adjuster is typically subject to little, if any review. The scope of damages for a particular claim can never be measured against any predetermined figure or objective standard. Every loss is unique in the scope and extent of damages claimed. The adjustment process itself is largely subjective. Whatever the damages may be, that is what they are for that particular file. The mere fact the damages may seem on the high end of the scale will seldom trigger scrutiny by a supervisor, especially where the assigned file handler is himself or herself a supervisor. Photographs of the damages in a claim file cannot readily be compared with photographs from other claim files. The fact certain public adjusters, contractors, salvors and attorneys regularly appear in a number of files does not, in itself, raise the red flag of fraud. Given these ever-present realities of claims handling, can there be any hope of preventing such fraud in the future?

With a practical approach to the problem, there is hope. First, the volume of claim files handled must be closely monitored by insurers. Apart from the potential for fraud, there is a very real human side to this. Stress, burnout and an emotional toll are the inevitable results of unmanageable file loads. As companies strive to down-size their claim operations, the outer limits of down-sizing must be recognized. Unfortunately, in the present environment this is a greater concern than ever before.
Second, an effective file review process must be established and put in place. Virtually all companies have a file review process, but it is time to consider a "review" of the review process. Claim file audits can be an effective tool, but they are by definition a random process. It remains a hit-or-miss system which cannot be relied upon to fully address this problem. This is not to suggest every claim payment must be audited and verified. It goes without saying, such an approach would be impractical, if not impossible. Instead, the file review and audit processes need to be evaluated for their effectiveness in dealing with this problem and identifying potential fraud. It is incumbent upon the companies to implement a system appropriate to their own needs and procedures. However, it is clear this case escaped the detection of the review systems of literally dozens of insurance companies who believed it could never happen to them.

Third, insurers must become more responsive to the indicators of internal fraud. There will always be rumors and false accusations against honest and ethical claims professionals. However, the companies must be alert and responsive to the fact internal fraud does exist and probably always will. It is one thing to give the benefit of the doubt while investigating internal fraud; it is another thing to give the benefit of the doubt by not investigating it at all. The New York insurance fraud ring could never have grown to the staggering size it reached without complacency as its accomplice. The aggressive approach to handling claim fraud by policyholders and claimants must become the model for internal investigations. The line of demarcation between good faith claims handling and bad faith claims handling is not defined by the failure to investigate claims out of deference to the "benefit of the doubt." Affording the benefit of the doubt to the insured in a claim investigation is not inconsistent with the concept of conducting an investigation at all. In dealing with matters of internal fraud, the same approach must be taken.

For all of us involved in the field of insurance, the New York fraud ring has left us feeling betrayed and even more cynical in our outlook. However, we must all make a renewed commitment to professionalism and ethical standards in our dealings with insureds, their representatives and our fellow claims professionals, to restore the integrity of a tarnished profession. It is a formidable challenge, but it is one we must all face if there are any lessons we have learned from the past.

Reprinted with permission from the author.

 
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