A new scam rocks the life insurance industry

Fraudulent activity is a critical issue that the insurance industry has been battling with for a number of years.

As the years go by, and economic times become tough, fraudulent activity increases. This puts insurers in impossible situations. Do insurers believe in moral values such as good faith, or do they approach every claim with a measure of scepticism? We recently published a newsletter discussing a new scam that is rocking the life insurance industry.

The other half

Just when you think you have seen it all when it comes to fraud, you get bowled over by the creativity and the lengths that some people will go to.

This was the situation regarding a spate of recent cases presented before the office of the Life Ombudsman where heart pacemakers are errantly implanted in healthy individuals who have enough medical cover to claim for what is an expensive procedure.

Enter the culprits

Judge Ron McLaren, the Life Ombudsman, points out that the complaint relates to Insurers X, Y and Z. These names were left out by the Ombudsman.

According to the Life Ombud determination, it was submitted that on 3 February 2015 an application was made to Insurer X for insurance. The following cover commenced on 1 March 2015 with Insurer X: life cover worth R5.5m, illness benefits worth R5.5m and disability benefits worth R2.75m.

It must be pointed out at this time that in addition to the cover with Insurer X, the complainant also successfully applied on the 4th of February 2015 to Insurer Y for the following benefits; life cover worth R6m, illness benefits worth R5m and disability benefits worth R1m.

Insurer Z also issued a policy to the complainant with effect from 30 March 2015 for the following benefits: life cover worth R6m and illness benefits worth R6m.

The heart of the matter

"In the application with Insurer X, the complainant was described as the owner of a business who had a monthly income of R30 000. Following an operation for a pacemaker implantation during August 2015, a claim for a policy benefit was rejected by Insurer X," said McLaren.

The Judge added that the insurer produced evidence that the complainant was unemployed at the time of the application for insurance. Insurer X pointed out that the complainant answered a question in the application form relating to previous and existing assurance in the negative by leaving it blank.

After referring to the insurance cover which had been granted to the complainant by Insurers Y and Z, with effect from March 2015, Insurer X averred that the complainant was hugely over-insured.

The complaint was dismissed by the Ombudsman on the grounds of the complainant’s non-disclosure or misrepresentation.

Further deceit

Insurer Y also rejected the complainant’s claim for the insured illness benefit in respect of the pacemaker implantation. The insurer relied on the incorrect employment and income information which the complainant had furnished.

The insurer further raised the complainant’s false negative reply (by drawing a line through it) to a question in the application form relating to other insurance cover.

"Insurer Y referred to the policies which had been issued more or less simultaneously by it and Insurers X and Z. The complaint was, likewise, dismissed by the Ombudsman on the same grounds of the complainant’s non-disclosure and or misrepresentation.

Insurer Z received a claim from the complainant for R1.8m under the policy for the pacemaker implantation.

This insurer indicated that it was awaiting the outcome of the criminal investigation of the matter.

The Ombudsman made a provisional ruling that the complaint could not be taken further until notification was received that the said investigation had been completed.

Red flags and questions

Reflecting on the scam, Judge McLaren said that he came to the following conclusions relating to this case, and other similar cases.

• It is believed the insurer which reported the pacemaker scam to the Ombudsman’s office said that the scam is financed by people who find financially indigent (needy) participants to apply for insurance cover. For a couple of months substantial premiums are paid by means of loans from the financiers to the participating applicants at allegedly exorbitant rates of interest. It is yet unknown what happens to the proceeds of a successful claim against an insurer;

• When questioned about the complainants’ inflated income, the Ombudsman’s office expressed the view that it is an inescapable inference that the reason for the falsity of the complainants’ disclosed income is to justify the substantial cover applied for and that they can afford the premiums; and

• Likewise, the complainants’ false negative replies to the questions relating to other insurance flow from their desire to hide from the insurers the extent of their cover for similar benefits, the Ombudsman’s office said.

If the insurance industry is serious about combatting fraud, they need to get on top of scams such as these and address them before they become major issues. However, that is easier said than done.