The first line of defense for insurers against fraudulent applications has historically been the insurance agent.  Agents see what the home office underwriters cannot and are entrusted in submitting valid applications.  But what happens when the agent violates this trust?  Unfortunately, agents are subject to the same temptations as everyone else, and greed is a powerful motivator, particularly in times of financial stress.  When it happens, the cost to insurers can range from consumer complaints and damaged good will to significant financial losses due to poorer than expected mortality and litigation exposure.  Ultimately, the consumer ends up paying the price through higher premium costs to cover the excess expenses.

Recent cases that have been highlighted in the press show some of the pitfalls that can affect an insurer, and the cost of the actions and remediation can be significant.  Below are some of the typical agent-related fraud cases in the news.

Pumping commissions: In June, the United States Secret Service announced that it had arrested an agent on federal charges for writing insurance policies on people, mostly seniors, who did not want coverage.  His insurance license had been revoked in 2019, but this didn’t stop him – he simply stole the identity of other licensed agents to continue his scheme.  Between his own sales and that of the agents whose identity he stole, he collected approximately $90,000 in commissions.  Consumer complaints led to the investigation and his arrest. Similarly, in September 2021, a Florida insurance agent was charged with fraud resulting from allegedly submitting nearly 100 life insurance applications without the knowledge or consent of the named policy holders.  His motive was apparently the collection of insurance commissions.

Fake people and switching identities: The U.S. District Court charged 23 people in June for various crimes related to insurance fraud.  The schemes included tricking insurance companies by submitting fraudulent applications, and then switching the identity of deceased people to obtain death certificates that matched the applications so they could collect the death benefits.   One of the 23 people arrested was an insurance agent who had a side business that performed medical exams for life insurance companies.  The people duped with the switched identities include first responders, medical provides, and law enforcement.  The take - $26 million.

Over insurance and wagering contracts: One of the oldest insurance schemes is to take insurance out on people with a high mortality risk, often without their consent or full knowledge, and without an insurable interest.  Wagering contracts became illegal in England in 1774, and by extension, the U.S. judicial system concluded that wagering contracts were against public policy.  That did not stop the STOLI schemes in the early 2000’s, and it hasn’t stopped many organized crime groups today.  While today’s wagering contracts are not typically as large as STOLI policies, they are numerous.   New digital processes and accelerated underwriting has made it easier for wagerers to get applications through underwriting without the knowledge or consent of the insured, and this often entails the assistance of a willing agent. 

A prominent case that highlights this was concluded in 2019 and involved 50 defendants and $33 million in profits. One of the agents admitted to selling “hundreds of fraudulent term policies” to elderly or sick people, inflating their income and net worth. In these types of schemes, the insured often does not know about the coverage being issued.  As we have seen in other articles, the identities of deceased people can and have been switched to match the insureds thus allowing the perpetrators to collect the death benefit when none is due.  In other cases, the insureds’ sickly health was simply hidden at the time of application, and an early death was expected by those in the know.

Keeping premiums: An insurance agent in California was recently arrested for keeping premiums from one of his clients intended for his insurance policy.  He was charged with elder abuse, identity theft, and grand theft.   A similar arrest was made in Ohio charging a former insurance agent with grand theft and insurance fraud for keeping premiums given to her that were intended for the insurance company.

This is just a sampling of the examples in the news, and we also see these in the work we conduct for our clients.  Unfortunately, most cases go unprosecuted.  In this writer’s experience, most insurance companies are happy to just cut ties with suspicious agents for fear of bad press or litigation risk. Insurers must be sure to exercise due diligence when vetting new agents and monitoring all agent activity.  Fraud can happen at any time there is motive such as greed or financial stress, and seemingly good people can go rouge when the pressure mounts.  Diligence has an extensive process for conducting background investigations on people, including potential agents, to mitigate the risk of fraud. 

For more information on the services offered by Diligence, contact Kevin Glasgow at [email protected] or call 972-660-4202.

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