By Neil Watson and Keith Gray

Insurance loss happens for many reasons.  For a business, common causes include armed robbery, theft, customer injury, floods, fires, and storm damage; but any natural disaster, large-scale event, or man-made act can bring about a claim.  When an event involves the loss of physical stock or damage to property, the loss is immediate, and it creates an urgent need for the business owner to settle the claim so that the business can resume operations and avoid further lost revenue.

This desire to quickly return to business as usual is a natural one, but in the wake of an event, it’s not uncommon for the resolution process to test the business owners’ resolve.  And while most claims post-incident are legitimate, from time-to-time, human emotions will complicate the process and create an environment that enables fraudulent activity, sometimes in unexpected ways.

Why Does Insurance Fraud Happen?

The Fraud Triangle provides all the insight required to answer this question.  Our team has written extensively on this, but Donald Cressey’s hypothesis in his book “Other People’s Money” says it all: Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation.”

It’s true that some fraudulent claims start out as legitimate but become ‘exaggerated’ during the claims process due to perceived opportunity.  In other cases, if the business is not doing well and is losing money, desperation can create enough pressure to commit fraud.  In rare cases, the fraud may involve large organized criminal gangs; these are often well-planned and involve multiple parties where the sole intent of the activity is a rational attempt to defraud an insurance provider.

It’s for these reasons that impartial guidance through the claims process is crucial.  As an insured, it is important to work closely with your insurance broker and the loss adjuster in preparing your claim and validating your losses.  Without this professional assistance and oversight, fraud can easily find its way into the conversation.

How Does Insurance Fraud Happen?

Below are a few examples of insurance fraud we’ve seen over the years at Lowers & Associates:

• ‘Padding’ legitimate claims to increase the claim amount
• Including losses from previous shortages or events within a big ‘single event’ claim
• Manipulating inventory, possibly running two sets of books, to allow for the tracking of actual inventory versus the falsely reported inventory
• Exaggerating the damage suffered as a result of a natural disaster (storm), or even causing some additional damage not caused by the original disaster
• Committing arson
• Staging accidents or thefts

The current COVID-19 situation globally, coupled with other localized events (recent looting losses in the U.S. or the extreme poverty facing certain areas in Brazil), is resulting in retail sales for certain sectors falling by over 50% and as much as 100%, which is clearly not sustainable.

In such unprecedented times as these, the possibility of a spike in fraudulent claims is a real concern. There is an increase in both the pressure and opportunity factors, resulting in an increased likelihood that potential perpetrators may rationalize their fraudulent thoughts and act on them as a result. For business owners, it can be hard to find consistency and understand what their default problem-solving steps should be.  When the Lowers & Associates team is presented with uncertainty, we often lean on process and procedure to identify a way forward in our work together with clients.  This path can always be informed by intuition, experience, and empathy, but for a business, without process and procedure to provide impartiality, the risk of insurance fraud increases significantly.

What Can You Do About It?

Ideally insurers would commission a pre-risk survey to establish security protections, stock levels, and standard operating procedures to satisfy themselves that the risk meets their requirements.  While this is recommended, it is not always feasible due to time or cost restraints.

Post-event, once a claim has been filed, relying on the findings of a law enforcement investigation may not be feasible due to timing or any related circumstances related to the event (especially if it’s large-scale or a natural disaster).  And even if law enforcement is doing an investigation on an event, it may not be a priority, creating an extended period of uncertainty.  Lastly, law enforcement may also be very hesitant to provide any info that they do have knowledge of, especially when it is an active investigation.

To manage this process, business owners and insurers need independent third parties that are flexible, have experience across multiple industries and can dedicate the appropriate time required to work through a claim (i.e. gathering facts, evidence and necessary documents) to support the basis of the claim.  For truly complex fraud matters, business owners and insurers should expect the third party to have a Special Investigations Unit (SIU) with extensive experience in technical surveillance countermeasures (TSCM) and counterintelligence that regularly work on international assignments.

With enterprise risk mitigation and insurance solutions that include UAV/UAS, special investigations, forensic accounting, loss adjusting and more, Lowers Risk Group stands ready to support our clients through the claims process with the speed, accuracy and dedication you’ve come to expect from over 30 years in the business.  To learn more, contact us.

About the Authors

Neil Watson brings nearly 30 years of insurance industry experience to Lowers & Associates, where he currently serves as Global Operations Director.  With key insurance industry relationships in both the London and International insurance markets, Neil’s primary responsibility is to grow all verticals and assist in building out L&A’s claims adjusting capabilities.

Keith Gray has been with Lowers & Associates for over 15 years and currently serves as the VP of Client Relations.  In his current role, Keith provides oversight with respect to program coordination, management of a nationwide team of industry professionals, investigation, and client communication.  Keith possesses a degree in Accounting and is certified as both a Certified Fraud Examiner (CFE) and Certified Anti-Money Laundering Specialist (CAMS).

People are often referred to as the greatest asset of an organization. While this may be true for your organization, the greater truth is, people also represent an organization’s greatest risks. The actions, inactions, and mere presence or influence of people, present a potential for loss across the spectrum of business activities.

Perhaps no source of risk is more perplexing, hurtful, and damaging than those caused by intentional harmful acts. Consider just a handful of startling facts:

1. 30% of business failures are due to employee theft.

Employee theft costs businesses an estimated $50 billion a year and is rising at a rate of 15 percent per year, according to the U.S. Department of Commerce. The Commerce Department and the American Management Association say that 30 percent of new business failures are due to employee theft and it is believed that 75% of employees steal from their employers at least once. (source)

2. Organizations lose 5% of revenue to ‘fraud from within.’

According to the Association of Certified Fraud Examiners (ACFE), occupational fraud is fraud committed against the organization by its own officers, directors, or employees–an attack against the organization from within, by the very people who were entrusted to protect its assets and resources. In its 2018 Report to the Nations, the ACFE projects that organizations lose 5% of their annual revenue to fraud. Of these cases of fraud, corruption represents one of the most significant fraud risks for organizations, with 70% of such cases perpetrated by someone in a position of authority (managers and owner/executives).

3. Workplace violence is the fastest-growing category of murder in the U.S.

According to OSHA, every year, 2 million American workers report having been victims of workplace violence. The Center for Applied Learning reports that workplace violence incidents have tripled in the last decade and is now the fastest-growing category of murder in the United States. And according to the Bureau of Labor Statistics (2016), fatal work injuries involving violence and other injuries by persons or animals increased by 163 cases to 866 in 2016; workplace homicides increased by 83 cases to 500 in 2016; and workplace suicides increased by 62 to 291. This is the highest homicide figure since 2010 and the most suicides since data collection began in 1992.

4. One in five American adults have experienced sexual harassment at work.

A CNBC survey found one-fifth of American adults have experienced sexual harassment at work. By age group, 16 percent of those ages 18 to 34 said they have been victims, while 25 percent of 50- to 64-year-olds say they have been. What’s more, according to a 2003 EEOC study, 75 percent of employees who spoke out against workplace mistreatment faced some form of retaliation.

5. 80% of active shooter incidents occur in the workplace.

The Center for Applied Learning reports active shooter incidents tripled in the last eight years, with an event occurring in the U.S. once every three weeks; furthermore, workers are now 18 times more likely to encounter workplace violence and an active shooter situation than a fire. According to FBI statistics, of 160 active shooter incidents in the United States between 2000 and 2013, over 80 percent (132) occurred at work.

Where there are people, there are risks. The actions taken by employees and even subcontractors representing your organization have a direct impact on the productivity, safety, and success of your organization. When those actions turn bad, either through negligence or intentional acts, the damage to people, brands, and profits can be significant. What are you doing to identify, prepare for, and mitigate your human capital risks?

Treating patients is far from the only concern faced by hospitals today. To protect the safety of patients, visitors, and staff, hospitals must now take extra efforts to anticipate and prepare for security threats.

Hospitals are vulnerable to crime and violence from patients, visitors, and occasionally their own staff members. Therefore, security systems in hospitals must include proactive measures to create and reinforce effective security protocols geared towards accountability, readiness, and responsiveness.

The first step to designing an effective security system is understanding the threats themselves.

Here are some of the top security issues concerning hospitals today:

1. Abuse and battery towards medical staff

Assault and battery towards medical staff are the most common types of abuse-related injuries to occur within healthcare facilities. 80% of serious violent incidents reported in healthcare settings were caused by interactions with patients and were usually caused by patients hitting, kicking, beating, and/or shoving medical staff. There are many reasons that contribute to this. For one, patients may be victims of an incident caused by a dispute, creating a hostile or volatile environment inside the hospital. In other cases, patients may suffer from instabilities due to addiction or mental health issues.

At highest risk of patient-inflicted violence are psychiatric aides, who are more than ten times at higher risk than nursing assistants, the second-most affected group. Other high-risk groups include emergency departments, geriatrics, pediatrics, and behavioral health providers.

2. Active assailant attacks

Researchers at Brown University reported 241 hospital shootings between 2000 and 2015. Breaking this down, the majority of in-hospital shootings happened in the emergency room (29%), next to the parking lot (23%), and in patient rooms (19%).

As recent stories exemplify, simply having a plan is not enough. A recent active shooter situation at Dartmouth-Hitchock Medical Center exhibited the need for a much more comprehensive security approach. When the shooter entered the hospital and shot a patient, “Code Silver” was announced to all staff members. However, most staff did not know what the code meant, let alone how to react. The code has since changed to “Active Shooter,” along with other modifications to improve overall hospital security.

Bethesda Butler Hospital in Hamilton, Ohio is working to enhance training. They hired actors to practice emergency response to a hospital shooting. As Ronald J. Morris, the Director of Corporate Security for Tri-Health puts it, “It’s all about preparation and telling people about developing the right mindset so they can be more prepared.”

3. Infant abductions

Infant abduction is the most common type of abduction in healthcare facilities. According to the National Center for Missing and Exploited Children, 317 cases of infant abductions occurred between 1965 and 2017. The majority of cases of infant abduction occur in the mother’s hospital room, with violence inflicted on the mother in 8% of cases. Before more advanced security protocols came to form, many of the perpetrators disguised themselves as medical personnel to steal a child, usually from the hands of the mother.

In response, hospitals have cracked down on security measures and patient education practices that directly address this type of risk. The system does not need to be complex, but it should be effective. For example, access to maternity wards should be limited to qualified personnel or individuals who can prove their relationship to a patient. This can be further reinforced with badges that identify the security clearance of medical staff.

4. Supplies and property theft

From drugs, food, and medical supplies, you could make an A-Z list of items that are stolen from healthcare facilities. In 2009, hospitals reported 272 incidents of theft. By 2015, this number rose to 2,926 – a 166% increase. The result can be extremely costly. As a single example, the Santa Clara Valley Medical Center in San Jose, CA counted 383 stolen pieces of equipment between 2010 and 2014, totaling to over $11 million in value.

Culprits include patients, visitors, and also staff. An employee at the Christus Santa Rosa Hospital-Westover Hills in San Antonio, TX admitted to stealing over $400,000 worth of equipment because “it was easy and no one asked any questions.” Hospital theft is a good indication of a vulnerable security system, and also contributes to unnecessary overhead costs.

5. Pressure to cut costs

While 49% of hospitals reported an increase in crime between 2016 and 2017, nearly 1 in 4 hospitals (23%) reported a decrease in its hospital security budget over the same period. Part of this involves a reluctance to hire more security staff. In an anonymous survey, hospital workers mentioned “more [security threat] incidents, no increase in staff,” as a key challenge for hospitals.

Given its impact on security measures such as employee training, staffing, and security equipment, the pressure to cut costs is one of the most devastating restraints to an effective security solution. With $3.6 billion in federal budget cuts announced for 2018, hospitals need to prioritize security measures that combine effectiveness with cost-efficiency to strive for the best return on investment and highest possible level of security.

Security demands are changing, and hospitals must keep up to protect the security of their patients and staff. To address the increasing risk of in-hospital crime, hospitals must prioritize prediction and prevention of crime just as much as how they respond to and manage incidents. Solutions to achieve this include more advanced technology and data collection, increased security visibility to deter criminals, and bolstering in-house security presence and security response.

Now is the time to examine and refresh whether your hospital is in need of updated practices. Explore our healthcare security and risk mitigation solutions.