In recent times, there has been an increase in the number of fraudulent claims being experienced by the insurance companies. This encompasses all classes of business, property, Casualty and Motor. This escalating incidence of fraudulent claims, especially in motor has been a continuing cause for major concern for insurance companies, and for the policy holders who are saddled with substantial increases in the premiums. The current difficult economic conditions effect the situation in two ways:-

1. It encourages more people to engage in fraudulent and exaggerated claims and

2. It makes it difficult for the policy holders to pay increased premiums, directly caused by the fraudulent acts.

Fraud is a criminal offence and is defined as willful misrepresentation of the truth with intent to deceive by one party resulting in actual or potential loss to another party. The statutory definition of fraud as a criminal offence appears in the Fraud Act which specifies and describes three different types of frauds:-

 Fraud by false representation

 Fraud by failing to disclose information

 Fraud by abuse of position. Under the act, a person found guilty of fraud is liable to a fine or imprisonment. The international Association of Insurance Supervisors (IAIS) in a guidance paper on preventing, detecting and remedying fraud in insurance defines insurance fraud as an act of omission or commission intended to gain dishonest advantage for a party (fraudster) or other parties.

This could be achieved by:-

 Misappropriation of assets

 Deliberately misrepresenting, concealing, suppressing or not disclosing material facts relevant to a financial decision, transaction or perception of an insurer’s status.

 Abusing responsibility, a position of trust or a fiduciary responsibility. By far, the greatest frequency of fraudulent claims is in motor insurance and occurs under third party liability section of the motor policy. Under the first party sections, the collision and comprehensive sections, the claimant is the policy holder himself, and as such the insurer would have had the opportunity of underwriting the risk and satisfying themselves that the risk was acceptable and premium rates adequate at the inception of the policy.

Third party claimants on the other hand are complete strangers to the insurer, and as such they are not bound by the policy conditions, and they are not legally obligated to observe the utmost good faith towards the insurance company. Third party claims are indeed adversarial in nature and the insurer has greater difficulty in their investigations. In these circumstances, it seems apparent that if third party claims could somehow be converted to first party claims, a positive advance could be made in the reduction of fraudulent claims, for the benefit of both parties to the insurance contract. This can be accomplished by the inverse liability insurance system.

Inverse liability insurance may be defined as first party liability insurance against injury and damage arising out of motor accident involving two or more duly insured vehicles, to the extent that the insured is not at fault. Inverse liability does not apply to single vehicle accidents, to accidents involving uninsured or unidentified (hit and run) vehicles, or to accidents involving vehicles insured by a foreign insurance company. Where the insured is at fault for the accident, he will be indemnified by the third party section of the policy.

The inverse liability insurance clause should state that the insured has no right of action against any person other than the insurer and an insurer has no right of indemnification from or subrogation against any person for payments to its insured under this section. In other words, this is a complete transfer of the insured’s common law rights away from the wrong doer, or wrongdoer’s insurer to the inverse liability insurer.

The insured is in no worse situation – on the contrary he is in a more favorable one in that, he is dealing with his own insurance company rather than a strange insurer. He is entitled to the same indemnity as he had against the wrongdoer for accidents where the coverage applies, as he retains all his legal rights where the inverse liability does not apply. Where the inverse liability applies, each insurer indemnifies its insured for a not - at- fault accidents under a first party coverage in exchange for immunity from third party claims against those of their policy holders who are involved in at fault accidents, this latter being covered by the insurance company insuring their not-at –fault driver under their inverse liability coverage. Since inverse liability insurer is first party insurance, the policy holder is bound by the policy conditions which will require him to cooperate with his insurer in the event of a claim, and he will be required to submit to medical examination at any time at the reasonable request of the company, and to supply any information to assist the company in arriving at equitable settlement. The insured is of course entitled to obtain his lawyer’s assistance in the settlement negotiations.

Inverse liability insurance may provide the following advantages:-

1. The elimination of uncertainty on the part of an injured insured in a not-at –fault accident

2. The ability of the insurer to more closely monitor and control injury claims and provide the best rehabilitation for the injured person

3. A reduction in claims expense due to the speeding up of the procedure

4. Better control of suspected fraudulent claims.

A part from inverse liability method of tackling fraudulent claims under motor Insurance, other methods have been used in handling the menace and one way of tackling fraud used by some insurers is to establish independent anti fraud units. This involves using dedicated and well trained staff that helps identify and deal with potentially fraudulent claims. Current claims handling philosophy dictates that honest claims be met fairly, equitably and promptly, but claims believed to be fraudulent should be challenged. However insurers must take care to treat all customers fairly, in particular where they (the insurers) may be incorrect in their assumptions regarding possible fraud and they cannot prove.

Fraudulent claims have the effect of reducing the profitability of the insurance companies. At the end of the day, somebody has to pay for this and this is the honest policy holder in terms of rising premiums. It is crucial that those insurers develop best practice and implement global fraud strategies while aligning the process to robust operational systems. We should never forget that every victory for a fraudulent claimant or criminal is a defeat for the honest policy holder. The Kenyan market recently came up with an Insurance Fraud Investigations unit mandated to deal with this hazard. Many different people commit insurance fraud, from sophisticated criminals to ordinary consumers and even insurance company employees.

Insurance fraud can take a variety of forms, such as:-

 The inflation of a genuine claim including items that were not stolen in a burglary

 Creating an entirely fictitious event e.g. theft that never took place and

 Causing deliberate as opposed to accidental damage to insured property e.g. pouring water into a DVD player or a computer key board.

Fighting fraud is one of the key objectives of modern claims managers. In the past, insurers showed a general reluctance to fight fraud. The reason for this was fear of adverse publicity, particularly if court proceedings were involved. Today, insurers are taking a harder approach to fraud and will take legal action in appropriate cases. Many insurance policies contain an express clause stating that all benefits otherwise due under a claim will be forfeited where fraud is proven. The position at common law is that if a claim is in any respect fraudulent, then all benefits under the policy is forfeited. It is usual to include the clause in the policy to strengthen the insurer’s position and raise awareness. There has been a lot of research recently into exactly what motivates individuals to commit fraud. This research has identified a number of questions that individuals ask themselves before embarking upon a fraudulent act.

 What is in it for me?

 What is the chance that the fraud will be discovered?

 What is my punishment likely to be in the event of my being found out?

If the policyholder feels that the chance of discovery is low and punishment will be light, they will be tempted to be fraudulent. Suspicion of fraud will not be sufficient to decline a claim. To discharge the onus of proof requirement, there must be enough evidence of a quality that is admissible in court. The burden of proof frequently leads insurers to resort to technical pleas of material non-disclosure, misrepresentation or breach of the duty of utmost good faith rather than attempting to prove the fraud itself.

While this will largely achieve the desired effect of avoiding the claim, it is not ideal. Although the wrong doer is not reimbursed for the claim, they avoid the taint of fraud because they are not prosecuted. Insurance agent and brokers are also involved in committing Insurance frauds. A common act of fraud by the agent is the issuing of policy document, taking premium from the policy holder, but then not passing the premium to the insurer.

When an agent commits fraud, the insurer will usually deny liability to the insured, which will be left to claim from the agent. In conclusion, we may say that there is a great need to fight fraud, and better Industry cooperation is the key to cracking organized general insurance fraud. Individual Insurers can’t tackle organized cross industry fraud. They only see a microcosm of activity. They do not see the whole picture.


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