Insurance Fraud Rises As State Bureaus' Budgets Fall

State insurance fraud fighting bureaus are seeing a significant spike in fraud cases while trying to manage with lower budgets and staffing in the downturned economy of 2009, according to a survey by the Coalition Against Insurance Fraud.

Cases increased in all 15 types of fraud schemes, these state agencies say.

“The troubled economic climate confronts many fraud bureaus with the severest challenge they’ve faced in years. But a positive outcome could be greater efficiency in combating schemes as fraud bureaus find better ways to fight crime with the resources they do have,” says Dennis Jay, the coalition’s executive director.

Agent schemes form by far the largest increases. Seven of 10 fraud bureaus report a spike in agent cases. Nearly 40 percent of fraud bureaus say their producer caseload was much higher, reveals the survey of 37 fraud bureau directors conducted in October 2009.

Anxious drivers continued ditching unwanted vehicles for insurance payouts in one of the defining fraud trends of the troubled economy. Seven of 10 fraud bureaus report more vehicle giveup cases, the coalition’s survey shows.

More homeowners literally are burning with desire for insurance bailouts as well. Nearly two thirds of fraud bureaus report increased home arson cases. This trend appears to involve regional or local hotspots instead of an evenly spread national problem, the coalition’s survey notes.

Shakedowns of businesses also appear to be spreading, with 60 percent of fraud bureaus seeing spikes in suspected bogus liability claims. “Reports of increases in slip-and-fall claims from insurers and self-insurers—especially grocers, department stores and restaurants—began surfacing in early 2009 and seem to have continued,” the coalition’s survey says.

Bogus health plans are spreading rapidly around the U.S. as well, exploiting the large market of uninsured Americans. Most fraud bureaus report a spike in fake health plans, with nearly 40 percent saying their caseload was much higher.

Prescription drug abusers also are on the loose. More than 60 percent of fraud bureaus report more cases involving diversion of painkillers and other addictive prescription drugs such as painkillers. Drug diversion has spread with alarming speed around the U.S. in recent years, with insurers paying billions of dollars for illicit prescriptions.

Many fraud bureaus are being forced to manage this spreading crime trend with smaller budgets and staff, the coalition’s survey reveals.

Some 63 percent of fraud bureaus report lower budgets for 2009. “This is somewhat surprising, given that a majority of the fraud bureaus were created with dedicated funding, specifically assessments on insurers,” the survey notes.

Nearly a quarter of the fraud bureaus also lost staff positions this year, and a third of these agencies were forced to leave vacant positions unfilled.

Why E&O Brokers Should Approach Additional Insured Requests With Caution

Professional liability brokers repeatedly receive requests from insureds to add the insureds’ clients onto their errors and omissions policies as additional insureds. As outsourcing has become more prevalent, so has this request.

At first glance, this request seems quite reasonable. A client requests to be added as an additional insured (AI) with the intent to have the insured’s E&O policy provide defense and indemnification if an error or omission by the insured results in the client being sued.

For example, a Web designer—the insured—uses an unauthorized image on a client’s Web site. The holder of the copyright then sues the client.

Although this might seem like a good reason to add the client as an AI, most of the time, a request to add a client as an additional insured on an E&O policy stems from a misunderstanding of the policy. There are three questions a broker should ask when such a request comes in.

• Is it even possible? In other words, will the carrier take the risk?

• If it is possible, is it desirable?

• Finally, if the decision to add the client onto the policy as an additional insured is made, what changes to the program should the insured make?

Adding clients as additional insureds on a general liability policy is commonplace, so why not on an E&O policy?

Quite simply, some carriers will not allow additional insureds on E&O policies for several reasons.

First, many reinsurance contracts will not allow non-professionals to be added to the policy, so the carrier’s hands are tied.

Secondly, coverage under the policy is triggered by allegation of failure to render, or negligence in rendering a defined professional service. Typically, the AI is not rendering the professional service and therefore coverage will not be triggered.

Additionally, underwriters offer terms based on an analysis of the insured’s exposure (services, revenue and other measures). Adding AIs broadens the scope of potential liability, and is difficult to underwrite. When an AI submits a claim to the carrier, they expect defense to be tendered even when there are no allegations of professional misconduct or negligence. Furthermore, if the AI’s operations involve broader services than the insured’s, then it could potentially open the policy to claims from the AI’s other professional activities.

Professionals, by law, are liable for their own negligence and the negligence of those for whom they have assumed vicarious liability (those who they have a right, ability and duty to control). However, E&O policies, by and large, exclude liability assumed under contract except when liability would have existed regardless of the contract. Therefore, when an insured accepts additional liability via contract, the contractual liability exclusion would preclude coverage under the policy.

Additionally, E&O policies contain insured-versus-insured exclusions that preclude coverage when one insured sues another insured under the same policy. The thought behind this is not to cover internal disputes and to exclude such a moral hazard.

E&O policies are “pay on behalf of” policies, which means the insurer will pay damages in the insured’s stead when a client or third party is injured by the insured’s negligence in providing professional services. The E&O policy is designed to compensate parties other than the insured. In situations where the client, an AI, is suing the insured, the exclusion in the policy will be triggered and, therefore, no coverage will be provided.

Furthermore, defense costs in most E&O policies are included within the limit of liability. Therefore, covering the defense of AIs can rapidly erode one’s policy limit, thus potentially leaving the insured exposed. Moreover, if the carrier is tendering a defense for both the insured and the AI, then a potential conflict of interest could arise.

If the carrier agrees to add a client onto the policy as an AI, and, in spite of all the above reasons not to, the insured elects to add their client as an AI, there are several items the insured, the broker and the AI need to address.

First, the AI endorsement needs to be carefully written to consider the AI an insured only in certain limited and clearly defined circumstances so as to limit the effect of the insured-versus-insured exclusion. Even with such a well-written endorsement, however, once the client seeks coverage as an AI, then any related claims made against the insured by the AI will not be covered.

Secondly, the AI must be made aware of the reporting requirements under the policy. Some questions that must be addressed are: When must notice be given to the carrier? What is the definition of a claim? Is the policy a duty-to-defend policy? Does the policy contain a strict hammer clause? (See “Insureds Need To Sort Out Potential Hammer Effects,” NU, Aug. 4, 2008, http://bit.ly/7x1ctI).

Alternatively, rather than adding a client onto their policy as an AI, consider coaching the insured to respond to the client’s request by doing the following:

• Explain why such an action is not in the client’s best interest. It provides no added protection and could actually reduce or eliminate coverage entirely.

• Work with the client and carrier to set a minimum policy limit and maximum deductible/retention that all parties feel comfortable with—ones that will provide an adequate limit of liability and a deductible that the insured can meet even in a catastrophe, and at a premium that is affordable.

• Assure the client that all reasonable effort will be made to maintain coverage for a specified period of time after the contract has ended, and negotiate a preset bilateral tail option. A bilateral tail means the insured may elect to purchase tail coverage (or an extended reporting period) if either the carrier non-renews or the insured elects not to renew the policy.

By working with their clients in good faith, and by expressing a solid understanding of the E&O policy, insureds can demonstrate that they are thorough, reliable and informed. Ultimately, such a demonstration can only help assure the clients that they have selected the right professional with which to contract.

Hartford, GreenRoad Team To Improve Driver Safety

The Hartford Financial Services Group, Inc., will seek to improve driver safety among its insureds by working with an outside vendor committed to using technology to improve driving behavior.

The Hartford, Conn.-based insurer said it has partnered with GreenRoad – a company that says it “helps commercial fleets, insurers and consumers measure, improve and sustain safe and fuel-efficient driving behavior.”

The carrier said it will use Redwood Shores, Calif.-based GreenRoad’s products and technology-based services—which include in-vehicle feedback, coaching, Web-based reporting and risk analysis tools—to help customers improve driver safety and overall vehicle operating costs. The GreenRoad tools “empower drivers to make immediate changes to their vehicle operating behavior,” The Hartford said.

The Hartford teamed with GreenRoad through its Hartford Ventures division, which identifies and teams with leading private companies with expertise in areas of key strategic importance to the insurance industry.

The Hartford Celebrates 200 Years

The Hartford Financial Services Group, Inc. will celebrate its 200th anniversary with a new marketing campaign that includes a refreshed brand and new advertising.

The Hartford, Conn.—based insurer said it plans an “aggressive and optimistic campaign” that will include new television spots, a refreshed brand and a commemorative logo.

The campaign is part of a broader brand refreshing effort that began earlier this year in preparation for the company’s 200th anniversary and also includes updated print advertising, logo, Website, collateral and other marketing materials.

The said it will commemorate its 200th anniversary on May 10, 2010.

The company’s new television and print advertisement are available at www.thehartford.com/advertising.

Health Care Reform To Have Major Impact on Workers' Compensation

Workers' compensation insurers and actuaries need to prepare for upcoming changes arising from proposed healthcare reform and the shifting medical landscape, attendees of the Casualty Actuarial Society (CAS) annual meeting heard.

Joseph Paduda, principal, Health Strategy Associates, LLC and writer of the blog "Managed Care Matters," observed that with or without healthcare reform, changes in the medical landscape will have a major impact on workers' compensation insurers.

Paduda noted that a number of pre-reform measures have already started to impact workers' compensation.

“The stimulus bill, the American Reinvestment and Recovery Act, included funding for development and implementation of Electronic Health Records (EHR). EHR supports clinical decision making, physician order entry for scripts or for imaging, and clinical data capture and sharing. Providers will all have access to the same amount of information instantly,” he said.

Paduda explained that the funding will improve the quality and depth of the data available, and pointed out that the use of electronic health records in workers' comp would be beneficial for actuaries practicing in that field.

The stimulus bill also calls for an estimated $1.3 billion investment in various agencies and research to evaluate the effectiveness of specific procedures and the impact of medical care on functionality, outcomes, and quality of life.

According to Paduda, this is likely to directly affect Medicare reimbursement policies, and over time, this will impact private pay and workers' compensation. “In my view this is a strong positive for workers' comp. A lot of medicine is more of an art than a science, so adding more science to medicine will dramatically improve outcomes and potentially reduce costs,” he said.

Paduda highlighted drug pricing as one area of potential change where the likely impact on workers' compensation will not be so positive. Currently, the United States is the only developed country where the government does not negotiate drug prices with pharmaceutical manufacturers, but this could change under several reform bills under consideration.

“The impact on workers' comp, if the Department of Health and Human Services negotiates for drug prices, is uncertain but not positive. Cost shifting is a distinct possibility. If one of the biggest payers of pharmaceuticals is suddenly paying them less, they’re going to want to make up their revenues from somewhere else, like workers' comp," Paduda said.

Alex Swedlow, executive vice president of the California Workers’ Compensation Institute (CWCI), gave an overview of the intended and unintended consequences of workers' compensation medical reforms in California.

Swedlow noted that prior to the 2003-2004 reforms, the California workers' compensation system was plagued by high rates and excessive variability in benefits paid to injured workers. Medical reforms focused on core elements of the system’s dysfunction, such as out-of-date fee schedules, the lack of a standard of care, and medical network utilization.

While enactment of the reforms in 2004 resulted in an immediate reduction in medical costs in the California workers' compensation system, Swedlow noted that the decline was short-lived. For example, in the post-reform period between 2005 and 2008, estimated ultimate medical benefit costs in California increased by 55 percent.

Swedlow observed: “The medical market has found a way to recover its pre-reform growth trends.” Another unintended consequence of California’s workers' compensation medical reforms is in the area of pharmaceutical utilization and cost.

Despite the reforms and the adoption of a pharmacy fee schedule, both the average number of prescriptions and average pharmaceutical payments per California workers' compensation claim have increased sharply since 2002.

Swedlow cited data showing that the average cost of “brand name” medications rose by 56 percent between 2002 and 2007. The average first-year cost of pharmaceuticals also jumped from $269 in 2002 to $462 in 2008 -- an increase of 72 percent.

One of the key cost drivers was a post-reform surge in the use of “Schedule II” drugs. These drugs are controlled substances that the federal government says have specific medical uses, but very high potential for abuse and addiction. “There has been a recent meteoric rise in the use of Schedule II drugs,” Swedlow noted.

The Casualty Actuarial Society's mission is to advance actuarial science through a focus on research and education. Among its 5,100 members are experts in property/casualty insurance, reinsurance, finance, risk management, and enterprise risk management.

Greenwood, township merger moves ahead to a vote in May

A proposed merger between Greenwood and unincorporated White River Township nearly hit the skids Tuesday, but instead it moved forward with a new target date for implementation -- if it is approved by voters.

And the issue will be the topic of special town meeting at 7 p.m. Tuesday at the Center Grove High School auditorium.

On Monday, Greenwood Mayor Charles Henderson said he'd like to see a referendum delayed from May to November and, if approved, an effective date for the merger changed from July 1 to Jan. 1, 2012.

Tuesday, Henderson didn't make it to a joint meeting between the Greenwood City Council and the township board, at which the members went through the plan recommended by a study committee.

But before going through the plan, they talked about Henderson's suggestion.

After a fair amount of discussion -- the meeting began at 7 p.m. at the Center Grove school administration building and it was nearly 9 p.m. when the plan was almost derailed -- the Greenwood council voted to proceed with a May referendum but push back the effective date of an approved merger to Jan. 1, 2011.

Both dates were sooner than Henderson had proposed, but council members reasoned that it would still allow for plenty of time to study the plan and, if voters approve the merger, also provide more time for to arrange the logistics of a merger.

The township board then considered the same motion. Board member John Ebert voted yes and Joe Acker voted no; the third member, board chairman Mark Messick, recently had surgery and was not at the meeting.

That left it to township trustee Jay Marks to vote to break the tie. However, he abstained, which meant the motion died.

And because both bodies must approve identical reorganization plans to trigger a vote by citizens in both areas, that vote would have killed the merger proposal.

However, Greenwood council member Ron Deer, presiding over the meeting as council president in Henderson's absence, called for a bathroom break.

Afterwards, Acker asked for reconsideration of the previous motion, the township board voted again and this time approved, on a 2-0 vote, the holding of a May referendum and fixing as Jan. 1, 2011, the effective date of the proposed merger.

Acker said after the meeting that he supports the merger, thinks that it's the best option for township residents and wants to have the vote. He also said he believed the merger could be accomplished by July 1 but didn't want to stop the process at the expense of making that point.

The council and board members went on to amend several sections, including stipulating that the new 11-member council will be presided over by a president, not the mayor, during a 12-month adjustment period.

Marks said Wednesday that he has scheduled the town hall meeting so that township residents can ask about the plan. The township attorney and accountant also plan to attend to address legal and financial questions.

The next steps apparently are for the council and board to hold public hearings at separate meetings on Dec. 21 and Dec. 22, respectively, at which they could take final votes on putting the plan to a referendum.

Smith Retires as K and K Insurance Group President and CEO

K and K Insurance Group Inc., based in Fort Wayne, Ind., reports that Ross T. Smith, the company’s president and chief executive officer, is retiring after a successful 40-year career in the insurance industry. Smith has been with K and K Insurance for more than six years.

Donald P. Koziol, president and CEO of the Aon Underwriting Managers group, is serving as interim CEO for K and K Insurance.

Founded in 1952, K and K Insurance Group is a managing general underwriter offering more than 50 specialty insurance programs to the sports, leisure and entertainment industries. K and K is a subsidiary of Aon Corporation.