Fraudian slips

In desperate times, people do desperate things. But all who pay a premium pay a price for insurance scams.
By Edward Martin

As the autumn sun warms the woods, Michael Duke settles in for another day. On assignments like this, he sometimes dons a ghillie suit, the tattered camouflage that snipers wear to blend into underbrush. On other jobs, he sits in his car staring at video images from a tiny camera secreted a quarter-mile away. At 47, he still carries some heft left over from lifting weights when he was a drug-enforcement officer, but he is soft-spoken. When frustration mounts on days like this, he coaches himself. “Patience,” he says.

The house he’s watching sits off a paved road in rural Granville County, north of Raleigh. The yard is clipped, the chrysanthemums tended. On his second day, she emerges, a middle-age woman, purse draped on her arm. She drives to a bank, then to Kmart, where she pushes a cart up and down aisles, shopping before returning home. The next day, a rented truck, a stick-on logo identifying it as a utility contractor’s, parks on the road near her house. Like an early riser’s yawning stretch, its bucket arm slowly flexes up. Now with a clear view of the back-yard, Duke videotapes the 52-year-old hoeing her garden, tugging a heavy hose, lugging a yard wagon loaded with potting soil and stooping to plant bulbs. For good measure, he shoots similar activities over two more days.

Duke turns over his tapes to the insurance company that hired him. They become evidence in a hearing before the N.C. Industrial Commission, the state agency that adjudicates workers’ compensation cases. It denies the woman’s claim that she had been disabled by an on-the-job injury moving boxes at a chain drugstore. “A false claim like that might run $25,000 to $50,000 for the insurer,” Duke says, “so $600 a day for a few days of surveillance, including travel time and everything, is a pretty good investment.” His Charlotte-based Carolina Surveillance & Investigations Inc. employs five to 10 private investigators, depending on the caseload.

A dime of each dollar paid in premiums is lost to fraud, state Insurance Commissioner Wayne Goodwin estimates. Carolina Surveillance’s speciality, like that of several dozen similar companies across the state, is workers’ compensation fraud. But that’s just part of a framework that includes health-insurance scams, staged automobile accidents — officials say North Carolina is experiencing a near epidemic of those — and bizarre property-and-casualty claims. In 2008, P&C fraud losses alone approached $1 billion in North Carolina, which ranked eighth nationwide, says Frank Scafidi, spokesman for the National Insurance Crime Bureau in Des Plaines, Ill. Employers, motorists, homeowners — everybody who buys insurance — pick up the tab.

In May, N.C. Department of Insurance investigators charged a Northampton County farmer after he claimed someone stole a $12,300 machine for removing chicken manure. They allege that he previously claimed lightning knocked out the fans in his poultry house, suffocating $2,700 worth of chickens. Lightning also was to blame, according to a Holly Springs man, for $44,000 in damage to stereo equipment and other electronic gear. Investigators say he fabricated repair bills, slipping up when he put the number of his own post-office box on them.

An apparently accident-prone man faces trial in Robeson County this month on charges that he staged dozens of automobile wrecks. Jonathan Christian Jones, 39, kept most claims to less than $3,000, small enough to fly under insurers’ radar, Assistant District Attorney Tony Berk says. “The North Carolina Department of Insurance has started aggressively investigating fraud, but a lot of insurance companies don’t share data with each other. Jones, in the course of nearly 40 accidents, has had claims against virtually every insurer in the state. Somebody dropped the ball.” Typical was one in March for damage to his 1993 Ford pickup. “He drove mainly old trucks,” Berk says. “I guess he figured they were safer.” According to investigators, he waited in the parking lot of a Lumberton Wal-Mart until his victim started backing from a space, then speeded up so she struck the side of his truck.

“We’re having a record-breaking year,” Kristin Milam, the Insurance Department’s public-information director, said in late November. It has the department’s 20 investigators scurrying. In 2004, they closed 38 cases. Midway through November, they had closed 276, recovered more than $10 million, arrested 144 people and obtained 73 convictions. In roughly the same period, the Industrial Commission fraud section’s caseload almost doubled to nearly 800. What’s behind this? A sagging economy — unemployment stood at about 11% statewide in November — and hundreds of companies struggling to stay afloat. In September, the CEO of Winston-Salem-based Pace Airlines Inc., a charter operator that also maintains planes for other airlines, was charged with failing to pay health-insurance premiums for 337 employees. Bret Grieves, vice president of the Greensboro office of Lynchburg, Va.-based Scott Insurance Inc., says what many think: “In desperate times, people do desperate things.”

Desperation, too, is turning an economic crime into something uglier. The driver in the Lumberton wrecks also faces charges of assault with a deadly weapon. “He didn’t seem to appreciate that when you attack someone by ramming their car with yours, that’s assault,” Berk says. A Charlotte insurance agent was sentenced in June to nearly 28 years in prison for the 2008 murder of a Department of Insurance auditor. Sallie Rohrbach had uncovered evidence that Michael Howell collected more than $150,000 in premiums from customers but failed to insure their cars.

Owners facing hard times once wiped the slate clean by torching their businesses, filing claims and starting anew. That’s less common now. Arson, for fraud or other reasons, decreased 6.8% in 2008 in North Carolina. “They’ve got much more sophisticated forensics,” Grieves says. “They’ve got better means of tracking people down on fire cases.” Insurance fraud frequently wears a new face, that of professionals.

On a summer afternoon, a 1998 Ford slowly tows a 2000 Jaguar on a deserted state road near Kinston. A 1997 Jeep approaches and slams into the back of the Jag. When the investigating Highway Patrol trooper writes his report, he makes a curious notation: There were no skid marks. In July, Rayon Lamont Artis, 32, pleaded guilty to multiple charges stemming from that wreck and others. He was sentenced to up to three years in prison. The Greenville resident, investigators say, had his girlfriend ram the Jaguar. Eight people in a ring he allegedly headed have pleaded guilty or await trial. “He bought cars with a high book value that had been salvaged because they had bad engines, water damage or whatever,” Insurance Department spokeswoman Johanna Royo says. The ring wrecked them and claimed full value. In the accident involving the Jaguar, Allstate Insurance Co. paid $33,643. In all, more than $100,000 in bogus damage and medical claims were filed.

In Robeson County, seven people have been charged with staging wrecks to collect property-damage and medical insurance, filing more than $130,000 in fraudulent claims. Four face federal charges, and three are scheduled for trial this month on state counts. Investigators sniffed a pattern. “You see multiple claims in a short period of time — the same people appearing in multiple accidents with the same people,” says Mickey Biggs, a former Lumberton police officer who was the state insurance investigator on the case. “And lots of soft-tissue injuries.” Unlike fractures, they’re difficult to disprove.

In the absence of tangibles — bent fenders or skid marks — other types of insurance fraud are more difficult to detect. Medical fraud, whether against commercial health plans, Medicare, Medicaid or third-party administrators and the self-insured businesses they serve, often is committed by nonprofessionals. “Unfortunately, a good description of it might be a crime of opportunity,” says John Hanlon, director of claims operations for Eastern Alliance Insurance Group. The Lancaster, Pa.-based company’s Southeast regional office is in Charlotte. It provides workers’ comp, health insurance, group plans such as dental coverage and serves as a third-part administrator. What those in the business call “soft fraud” and insurance abuse are major concerns for businesses and insurers. “Fraud gets the blinking light,” says Mike Arnaud, client-center manager for BB&T Insurance Services in Greensboro. “But abuse is an area that might have as much impact as fraud — the tale of the little white lie.” Hard fraud is clear-cut. Hanlon cites a case in which his company investigated a tip from a dentist that two people were using the same Eastern Alliance dental-insurance card. Soft fraud is harder to prove. Attitudes are at play. “Many look at insurance fraud as a victimless crime: ‘So what if I get an extra week off from work or a new set of golf clubs? They have a lot of cash.’”

Such attitudes, coupled with economic circumstances, create a volatile stage for fraud — and sometimes in unlikely ways. Out-of-work homeowners might neglect maintenance, leading to broken plumbing, which they then file as a water-damage claim. Or employees about to get laid off or fired — insurance investigators say the unwitnessed Friday-afternoon accident is so common that it’s a red flag — file to ensure income after the job’s gone.

Insurance fraud, however, is not limited to individuals. Employers also engage in workers’ comp scams. Industrial Commission investigators’ caseloads are about evenly divided between people who have filed potentially fraudulent claims and employers who fail to insure workers. Usually, companies with more than three employees must buy workers’ comp insurance. They might understate their number of employees to get lower premiums or lie about the danger of jobs, perhaps classifying a high-risk roofer as a sales rep. In one case, a Charlotte roofing company used another company’s workers’ comp insurance to land a subcontracting job. The fraud was detected when a worker fell and filed a $600,000 claim.

Why risk detection and a possible fine? Insurers say penalties are generally mild. “Restitution is obviously the No. 1 goal, but the question is always, ‘Can we collect?’’’ Hanlon says. “With most, the perpetrator doesn’t have a prior record, so it’s not like they’re going to spend the next six months in jail. They get probation or suspended sentences. Most are good people in tough times who make bad decisions.” Not to mention that proving insurance fraud is lengthy, difficult and frustrating.

Sam Constance does not lie in the woods wearing camouflage. A former cop, the Industrial Commission’s chief fraud investigator was trained by the FBI to detect white-collar crime. He is coolly objective, a patient man. He has to be. He figures even a wheelchair-bound workplace-injury victim who goes dancing deserves a fair hearing. The worker — Constance declines to be more precise about identifying the person — claimed total disability and, over several years, insisted the condition was worsening. Thousands of dollars were required to make the worker’s — make that, ex-worker’s — home handicapped-accessible.

Acting on tips — neighbors and co-workers riled by abuse of the system often blow the whistle — that this person had, among other things, been seen dancing, the Industrial Commission referred the case to Constance and his team. They got search warrants and court orders and, over a period of months, “found multiple bank accounts in the victim’s name, tracked cash flow and identified locations such as eating and shopping places frequented.” They identified 60 witnesses, many who had never seen the person in a wheelchair. “If you’re wheelchair-bound and can’t leave home, how can you visit this restaurant twice a week? We have your signed receipts.” He got surveillance tapes from banks and stores showing the victim walking normally. Searching the house, he discovered the paid-for modifications had not been made. The local DA filed fraud charges. The subject pleaded guilty and agreed to repay several hundred thousand dollars.

Not all investigations are as complex. But most involve a team that consists of informants, insurers, private investigators, state agencies and local prosecutors willing to launch criminal trials. In workers’ comp — the Industrial Commission has only four positions for criminal investigators to cover a workforce of more than 4 million — the typical sequence begins when an insurer hires a private investigator, then presents his surveillance findings to the commission. The commission can then grant or deny the injury claim or refer it to Constance’s staff for possible criminal investigation.

There are signs that times are getting tougher for insurance swindlers in North Carolina. Goodwin, a former state legislator and assistant insurance commissioner, was elected to the department’s top job in 2008 on a platform of fighting fraud. “Insurance fraud, like other financial crimes, ends up costing us all through higher premiums,” he says. In 2007, the legislature authorized the Industrial Commission to employ sworn law officers such as Constance to bust fraud, and the commission, which processed 63,000 claims in 2008, has increased staffing. Insurers say they’re getting tougher, too.

For example, Scott Insurance has about 30 claims agents in Greensboro, many serving workers’ comp clients. “When they feel a person is malingering,” Grieves says, “we’ll order a surveillance or try every other means possible to get them back to work.” Acting as a broker, “if we think we might have an embezzlement issue, we’d report that claim to the insurance company that day. Now, most companies have their forensic accounting and investigative teams.”

Fraud won’t disappear, even after the economy recovers. Grieves suspects 90% of insurance fraud is not detected, and while big cases capture headlines, smaller claims eat at corporate bankrolls. “People often talk about the CFO who makes off with $100,000 from his company, but that same company has probably had $250,000 taken in workers’ comp fraud. It’s the quiet, seeping-out-the-backdoor fraud that, unless you spotlight it, will be going on more and more.”