Life Ombud: Ombuzz Issue
FRAUD
Fraud occurs in the insurance industry in various forms. Our office becomes aware of fraud in two ways, either because the complainant alleges fraud on the part of the industry, most often in respect of complaints about fictitious policies and misselling, and, where complainants have lodged claims and the insurer discovers fraud involved in the policy transaction.
It has always surprised us that consumers who have perpetrated fraud would have the gall to then complain to our office when their claims are not paid, but it happens.
Fraud in insurance, like any criminal activity, has far reaching consequences. Apart from the general negative effect of crime on society, it can affect individuals financially, and increase premiums for the whole of the policyholder base. It will have this effect, whether the fraud is detected (because of the cost involved in the detection) or not (when false claims are paid out). The following case studies demonstrate the two sides of fraudulent activity.
Fictitious policies
Fictitious policies are policies issued without the ”applicant” actually applying for the policy.
The most common incidents occur with Government employees who are paid using the Persal system. There are numerous employees who have had premiums deducted from their salaries without ever authorising such deductions or applying for the policies. False applications are submitted by intermediaries using illegally obtained salary codes for these employees and using signatures, which are usually obtained from other documents. A ‘cut and paste’ operation is applied in the creation of a false application.
The employees may not become aware of the fraudulent deduction immediately either because they did not receive a salary slip timeously, or they did not check the deductions on the slip carefully enough (this usually occurs when the employees have several policies being deducted from their salaries).
The intermediary involved in the fraudulent ‘sale’ of the policy receives the upfront commission. The complainant is prejudiced by being out of pocket while the insurer investigates the allegations of fraud and until the deducted premiums are refunded. The unauthorised deduction could have a knock-on effect because the lack of funds may lead to debit orders or other deductions not operating because of lack of funds. In addition the complainant also has the inconvenience of having to prove the fraud, usually by having to submit an affidavit plus specimen signatures to the insurer.
The insurer has the expense of investigating the allegations and refunding the premiums (and not always being able to claw back the commission), the cost of issuing a policy and capturing the policy on its system. In some instances there is the additional cost of being involved in court cases against the fraudsters if they are caught and prosecuted.
Given the prevalence of this practice it is, of course, vital for insurers to build in checks and balances to try and detect fictitious policies, and yet some very obvious cases seem to slip through.
It is also unfair for people to carefully check salary slips and bank accounts so any unauthorised deductions can be detected.
Case study 1
A single complainant had been issued with 6 funeral policies, all providing similar funeral benefits. 3 Policies were issued in October and November 2009 and 3 further policies in May and June 2010. The premiums varied from R81,00 to R150,00.
The complainant alleged that she had never applied for any of these policies or authorised the deduction of the premiums. The insurer, after investigating the matter, returned all the premiums as it accepted that the policies had not been authorised.
Shortly afterwards another complainant complained about 15 policies, each with a premium of R100, being issued to her in a single month by the same insurer. She wanted a single policy with a premium of R1 500. After this incident she wanted all the policies cancelled with a refund of premiums. This was done by the insurer. Presumably the intermediary preferred to sell 15 policies because more upfront commission would be payable than on a single policy for R1500.00.
We questioned the insurer about the fact that these multiple applications had not raised any “red flags” during the application stage.
The insurer responded that it would introduce measures for detection of multiple applications for a single client. We were surprised that this had not been part of the insurer’s existing control measures.
Fraudulent claims
These claims come in many different forms. One of these is where the identity of the deceased life insured is questionable.
Case study 2
A complainant, Mr A, lodged a complaint about the non-payment of a claim in terms of a policy on his brother’s life. The complainant was the beneficiary. The sum assured was R150 000. The life assured was murdered on 16 December 2008 and the complainant lodged a claim. He alleged that his brother had disappeared and his body found in the mortuary some time later. The insurer paid the claim after the complaint was lodged with our office.
Some months thereafter the same complainant, Mr A lodged another complaint against a different insurer, because another policy for R768 000 on his brother’s life had not been paid out.
There were some discrepancies in the claim documentation submitted, which made the insurer suspicious and the insurer indicated it was not clear whether the deceased was in fact the life insured:
•The date of death differed on the different documents.
•The ID document of the deceased submitted to the insurer was very clear except for the photograph of the deceased, which was very blurry.
•No records of finger prints could be found.
•The funeral undertaker (who was suspected of involvement and under investigation by the police) had reported that the body was in a state of decomposition on 31 December 2008 when the body was “discovered” by the brother. This was despite the fact that the body had been in refrigeration from the date of death (16 December 2008).
•No details of the regular medical practitioner were submitted on the claim form. It was not clear who the medical practitioner was who certified the death.
The insurer required more documentation from the complainant in order to establish the validity of the claim.
There was sufficient evidence on file to suggest that this case was one more suitable to a court procedure where witnesses could be subpoenaed and cross examined and we consequently dismissed the complaint on this basis in terms of our rule 3.3.3.
Another complainant Mr B (the uncle of the deceased) had also at the same time lodged complaints with this office about unpaid claims on the same life assured. Mr B had taken out 3 different policies with 3 different insurers for amounts of R500 000, R100 000 and R270 000 respectively.
In two of these cases the insurers concerned had noticed the discrepancies mentioned above and refused to pay out until such time as the claimant had been able to clear up these discrepancies. We accordingly also advised Mr B that the matters should be pursued through a court of law.
Because the policies had all been relatively “new”, i.e. less than 6 months old they raised a red flag with the insurers that did not pay the claims concerned. These insurers also checked whether there were policies with other insurers. In fact all the policies had been taken out in a 2 month period, July and August 2008.
The unfortunate aspect of this case was the fact that Mr A’s earlier complaint had led to the payment of a claim for an amount of R150 000 and one insurer had paid Mr B’s claim for R100 000, before we became aware of the potential fraud in these cases. Once again in this case the insurer had not detected all the discrepancies and had not checked (we discovered afterwards) whether the insured had other policies on his life. Both the insurers that paid the claims were large insurers. (The insurers concerned would of course be able to reclaim the money if the fraud was proved and the claimants could be found).
It appears to us that some of the larger insurers have a business practice in terms of which they pay out on policies with sums assured of less than a certain amount without doing the same type of checking that they would do on larger policies. Some of the smaller insurers and some of the larger insurers check for fraud on every claim received. One of these smaller insurers informed us that 9% of claims received by them are classified as fraudulent.
This unfortunate case demonstrates that probable fraudulent claims will be paid if insurers are not diligent in their checking of claims and that fraudsters will come to our office to pursue claims.
NON-DISCLOSURE
There is a duty of good faith on applicants for insurance to fully disclose all relevant facts known to them. If there is non-disclosure (or mis-disclosure) the insurer is allowed to withdraw from the contract, whether the non- disclosure was fraudulent or not.
Some non-disclosures are negligent where an applicant had no intention of misleading the insurer but e.g. simply forgot about a visit to a specialist or regarded the visit as unimportant, although it was in fact material. Where that happens, our office applies the so-called Didcott principle (see Newsletter No. 1 for our practice in this regard).
However, where the non-disclosure is fraudulent the Didcott principle is not applied. A clear case of fraudulent non-disclosure is the following:
Case study 3
The applicant took out a policy on his own life on 23 November 2010 with a date of commencement of 1 December 2010, for a sum assured of R500 000 by way of a telesale.
During the sales process the applicant disclosed that he had pancreatitis in 1994 and that he had been hospitalised for it. He disclosed that he had high blood pressure and was on treatment. He also disclosed that he had diabetes and was specifically asked by the operator:
“Have you been admitted to hospital in the last 3 years for this condition?”
He answered: "No".
A policy was issued and 1 premium paid.
The life assured died of multi organ failure on 22 December 2010 and a claim was submitted by his wife. It then transpired that the applicant was in fact in hospital for treatment of a “diabetic foot” when the telesale took place. The insurer relied on mis-disclosure regarding the hospitalisation to repudiate the policy and the deceased’s wife complained to our office. In a situation such as this we uphold the insurer’s right to void the policy because the applicant had clearly lied to the insurer.
