 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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