The fight against insurance fraud has always been one of the important activities of insurance and reinsurance companies. It becomes particularly urgent in times of economic crisis, when the number of fraudulent activities in insurance industry significantly increases. The experience of recent years also shows that a special examination of legislative innovations and even changes in judicial practice is required in terms of their impact on the creation of favorable conditions for the growth of traditional insurance fraud and the emergence of its new forms.
The main areas of insurance fraud
In the Russian Federation until recently, the main area of insurance fraud was hull insurance vehicles, which certainly led in the number of cases of fraud, but the amount of money that can get a fraudster on each such case is relatively small. At the same time, experts estimate that about 10% of the total payments under hull insurance contracts are payments to insurance fraudsters.
Quite often insurance fraud occurs in the insurance of cargo and goods in storage. However, statistics show that the number of insurance events under such insurance contracts increases surprisingly during economic and financial crises. There is nothing surprising in this. When consumer demand for goods drops, then their owners have a natural question, what to do with them next? Continue to keep them in storage, incurring all the associated costs and with no prospect of sale in the foreseeable future? The situation is considerably worsened if the goods were purchased on credit and the moment is approaching when the credit must be repaid. Therefore, there are more frequent fires in warehouses, when all the goods burn down, trailers with cargo disappear, etc.
It should be emphasized that the risk of insurance fraud in these types of insurance increases dramatically, if the insurer is willing to cover any theft of property, not only burglary, robbery or robbery, that is, cases of apparent unlawful taking of someone else's property. If the insurer has not included a burglary-only insurance clause in the insurance contract, there is a great risk that an unscrupulous property owner will try to compensate the insurance company for any shortage of property, even if it was caused by his employees, or he will sell such property himself and pass its absence off as the result of theft.
Insurance of precious metals and stones is dangerous from the point of view of insurance fraud, because here it is relatively easy to mislead an insurer by passing off a counterfeit as genuine jewelry.
There was a time in the history of Russian insurance, namely in the first half of the 90s when insurers made big insurance payments on certain categories of marine insurance contracts in almost 100 percent of cases. We are talking about situations when foreign companies and citizens bought scrap marine vessels, entered into towing contracts and pulled these vessels to ports in South-East Asia, Bangladesh, India. Almost always owners of purchased scrapped ships insured them in case they were lost en route. Russian insurance companies, not very experienced in the matters of insurance fraud at that time and having stung on rather large sums of insurance premiums easily entered into such insurance contracts. If the sum insured under such insurance contracts was comparable with the profit the owner of a decommissioned ship could get from scrapping it, such ship would inevitably sink as soon as it left Russian territorial waters. And really, what is the sense in towing the ship to a distant port, hiring shipyards, a team of workers to cut the hull, engine and other metal accessories, transporting scrap metal to collection points, when in fact the same amount could be received directly from the insurer?
In today's insurance history of Russia among the leaders in cases of insurance fraud confidently goes compulsory insurance of civil liability of vehicle owners (OSAGO/CMTPL). In this case insurance fraud is associated not so much with staging an insured event, but with the use of established judicial practice in disputes arising from insurance contracts. Since the number of disputes under insurance contracts has for many years been the largest share of court disputes in general, the courts have almost always satisfied the claims of policyholders or beneficiaries. This makes it possible for specialists, called auto lawyers, to make extensive use of such a situation. Some of them not only help the injured party to get from the insurers of CMTPL policy full compensation for damages plus the sanctions provided by the legislation on compulsory insurance and on the protection of consumer rights, but also build fraud schemes to earn on this significant money. In such schemes involve employees of the traffic police, appraisers and even judges. After that, the car lawyers purchase from the victims their rights of claim against the insurers, and, tellingly, sometimes at a price that exceeds the amount of the loss, ensure the execution of documents, according to which the amount of damage increases significantly, and create a situation in which the court has all the grounds to recover from the insurance company a penalty for delayed payment of insurance compensation, a fine for refusing to settle the dispute in pre-trial order, compensation for moral damage.
As a peculiar insurance fraud should be qualified as a message by the insured to the insurer in the insurance transaction untrue or incomplete information about the essential terms of insurance, which occurs, incidentally, quite often because of the desire of policyholders to save on insurance premiums.
Insurance fraud in reinsurance is specific. Firstly, dishonest insurance companies act as fraudsters here. Secondly, since it is a sphere of professional relations, the methods of insurance fraud are specific. For example, obligatory treaty reinsurance contracts in Russia result in higher loss ratios (ratio of indemnities paid to reinsurance premiums received) on average than in facultative reinsurance by 15-20% mostly thanks to the so-called antiselection of risks. An unscrupulous insurer-reinsurer does not cede all risks that he was obliged to cede under the relevant contract, but selects from them those that he considers the most dangerous. Those risks that he assesses as less dangerous, i.e. which in his opinion have less chances to occur as an insured event, he does not include in the list of reinsured risks (premium bordereau) in time and therefore does not pay a reinsurance premium for them. Such risks are included in premium bordereau and losses bordereau only when insured event occurs. This practice leads to the fact that the amount of reinsurance premium due to the reinsurer is artificially reduced compared to what he originally expected, but he is obliged to participate in the payments on all insured events.
The second quite widespread method is that in the loss bordereau the reinsurer twice includes the same insured events or insured events, claims on which the reinsurer has paid earlier. The fact is that reinsurance contracts usually have the so-called "cash loss" clause, by virtue of which the reinsurer makes payment outside the normal settlements between the parties to the transaction and, as a rule, much faster. So the unscrupulous reinsurer includes these already settled insured events under the contract of obligatory reinsurance in the next loss bordereau and deducts the appropriate amount of insurance compensation from the reinsurance premium again.
There are cases when the bordereau of losses includes information on such insured events that do not fall under the scope of the reinsurance contract.
One of the most dangerous methods of insurance fraud for reinsurers in reinsurance relations is the provision by the reinsured to the reinsurer, with the intention to enter into a contract of non-proportional reinsurance, incomplete statistical data on its insurance portfolio and, most importantly, on the number of insurance events and the amount of insurance compensation paid and payable. All this is necessary for the reinsurer in order to determine the amount of reinsurance premium, which should be sufficient to cover the upcoming insurance payments under the reinsurance contract, the cost of the reinsurer's business and ensure its planned profitability. If the information about the amount of insurance payments on the reinsured insurance portfolio is understated, the reinsurer will receive less reinsurance premium, but will have to participate in its share of all insurance payments, which will inevitably lead to unprofitability of this reinsurance contract. For example, for one obligatory reinsurance contract the reinsurer underreceived the reinsurance premium in the amount equivalent to $1.2 million, and the insurance indemnity payments on it eventually exceeded the premium received by the amount exceeding the equivalent in US dollars by one million.
Sometimes unscrupulous reinsureds deliberately delay transferring reinsurance premiums to reinsurers, earning on them investment income for the time of delayed payment.
Finally, there may be collusion between the insured under the main insurance contract and the insurer - reinsured in order to get money from the reinsurer. This can be the preparation of documents about the insured event under the insurance contract, which in reality did not happen, or in order to overstate the amount of the loss. Sometimes the insurer, for one reason or another, interested in maintaining relations with an unscrupulous insured, without even a superficial investigation, immediately recognizes some event as an insured event, which makes it very difficult for the reinsurer to protect its interests, because the courts when considering disputes under reinsurance contracts almost never go into the question of whether there actually was an insured event under the main insurance contract, especially if the insurer admitted the existence of the insured event.
The concept of a fraudulent claim under Russian law
There is no concept of a fraudulent insurance claim in Russian law.
Fraud in insurance is defined in Article 159.5 of the Criminal Code of the Russian Federation as theft of another's property by deception regarding the onset of an insured event, as well as the amount of insurance compensation payable under the law or contract to the insured or another person. Forgery, production or sale of counterfeit documents, state awards, stamps, seals, letterheads is a criminal offence under Article 327 of the Criminal Code of the Russian Federation. Criminal offenses are also recognized as falsification of evidence in a civil case by a person involved in the case or his representative (paragraph 1 of Art. 303 of the Criminal Code), as well as knowingly false testimony of a witness, victim or expert opinion or testimony, expert testimony, as well as knowingly incorrect translation in court or during the preliminary investigation (paragraph 1 of Art. 307 of the Criminal Code).
In practice, fraudulent actions of the insured may manifest itself in deception regarding the fact and causes of the event declared as an insured event, in increasing the amount of losses and in falsification of evidence attached to the insurance claim, as well as in concealment of circumstances affecting the change in the content of the insurance claim. However, there is no special regulation of such cases in civil law.
As for the intentional actions of the insured aimed at the organization of the insured event, this issue is resolved in Art. 963 of the Civil Code of RF, and such actions exempt the insurer from the insurance payment, but the difficulty is that the intent must be proved so certainly that the court has not even the slightest doubts about it.
Pre-assessment of an insurance claim
At what point does an insurer's in-house lawyer, much less an outside lawyer, get involved? The answer, unfortunately, is the following: "It's usually too late." We are not saying that in this scenario, the case has no prospects, but it should be taken into account that the work of the lawyer is more complicated, because he begins to influence the situation, when the conflict with the insured (beneficiary) is in full swing.
Collecting and systematizing evidence for the court is a more complex process than the same work at the pretrial stage, because a lawyer reviewing a claim with evidence of fraud has to use not only arguments related to fraud, but also other arguments, such as:
- violation of the terms of the entry into force of the contract,
- misrepresentation and concealment of information prior to the commencement of the contract,
- violation of the essential terms of the contract,
- breach of obligations following from the principle of good faith,
- exaggerated claim amounts.
Some arguments - especially those involving the highest good faith principle, misrepresentation, concealment of circumstances and breach of material terms may be easily lost due to the insurer's subsequent conduct.
A qualified attorney assigned to handle a fraud case will analyze the totality of the circumstances based on the information available and assess what types of defenses could potentially be used. It is extremely rare in our practice that a position based solely on anti-fraud can be used.
Collection of evidence and remedies for insurer's legal defense of fraudulent claims
Russian courts have a very high standard of proof, so the maximum amount of evidence must be gathered prior to trial. In accordance with Russian arbitration and civil procedure law, each party must prove the circumstances to which it refers in its claims.
Generally, this means that the insurer should investigate prior to the civil dispute, conduct the necessary inspections, interview witnesses, and conduct expert examinations, when necessary, prior to taking the case to court.
Russian law does not provide special regulation for fraudulent insurance claims. An insurer cannot withdraw from an insurance contract solely on the grounds that the policyholder has filed a fraudulent claim.
The Supreme Court of the Russian Federation has formulated a legal position according to which the insurer's denial of insurance payment can follow only on those grounds that are specified in the law. Although for the area of arbitration justice is allowed to relax in the form of the possibility of inclusion in the insurance contracts and other grounds for denial of insurance payout, but in general the courts in this case, too, most often side with the insured or beneficiary.
It should be emphasized that Russian law contains no provisions for liability of the parties to a dispute for unreasonable statements and giving false explanations. Consequently, the maximum that may occur in such situations is a refusal to pay on the grounds that the insured or the beneficiary has not proved the validity of his claim.
The insurer's statement on the failure to prove the claims of the insured (beneficiary) alone is not enough to deny the insurance payout. It is necessary in all cases to collect the widest possible range of evidence, confirming directly or indirectly the insurer's conclusion.
So, if there is a suspicion of insurance fraud in case of fire in a warehouse, it is important to collect documents confirming the fact that there were no relevant goods in the warehouse at all or their quantity was significantly less than declared, or when it comes to goods with a certain shelf life, about the expiry of this period at the time of the fire. For example, if the insured claims that imported goods were stored in the warehouse, it is necessary to obtain documents confirming that these goods were legally imported into the territory of the Russian Federation. If the insured is unable to provide supply contracts, invoices with a customs stamp, then this will at least indirectly indicate that it is likely that such goods were not in the warehouse or were smuggled into the territory of Russia.
It was this tactic that allowed the insurer who had insured the goods in the warehouse and in the sales areas to win a dispute in court over the insured's claim for insurance compensation. The insured was the owner of several clothing stores in Vladivostok. She had insured goods in the warehouses and sales areas of all of these stores. At one of them she claims the goods were stolen. An inspection of the scene of the theft revealed the following. The warehouse was in the basement of a house. Above the warehouse was a clothing store. Above the store was the insured's apartment. The criminals broke into the policyholder's apartment while her family was away, made a hole in the floor, and thus entered the store and the warehouse. According to the policyholder's statement, a significant amount of Chinese furs were stolen, and the thieves, in order to cover up the traces of the crime, disrupted the water supply system, which caused the storage room to be partially flooded.
When the insurer demanded documents confirming the purchase of the furs in China and their clearance, the insured was unable to do so, stating that all documents relating to the stolen goods had been destroyed in the flooding of the premises. However, the report of the inspection of the scene did not record any remains of paper documents. In addition, the insurer was able to obtain documents showing that the insured had recently experienced financial difficulties, as its trade volume had significantly declined. All these facts gave the insurance company grounds to refuse to pay the indemnity because the insured had not proved the existence and extent of the loss. Arbitration courts, where the insured filed a claim for insurance compensation, supported the position of the insurance company.
Another example is even more telling. An insurance company from Moscow had insured a cargo of alcoholic beverages, namely, German liquor, which was being transported from Moscow to Izhevsk. On the way, the truck overturned and as a result the cargo was destroyed as indicated in the GIBDD report.
The insurer suspected insurance fraud. The insurance company's security service headed the investigation of the insurance case in this connection. The employees of this service set as their main task to achieve initiation of the criminal case on the fact of fraud, as cargo loss as a result of fraudulent actions was an exclusion from the insurance coverage.
Unfortunately, the insurer's efforts in this direction did not lead to the desired result because of the opposition of the insured. If an investigator initiated a criminal case for fraud, the prosecutor reversed the ruling. And it went on like that for about a year. According to the security service of the insurance organization the insurer was opposed by an organized criminal group, specializing precisely in insurance fraud.
In such a situation the insurer's management finally came to a conclusion that it was necessary to involve lawyers both from inside and outside, taking into consideration that the insured would hardly be able to avoid going to arbitration court with a claim for recovery of insurance compensation.
At the joint meeting of all interested specialists there was worked out a tactic of further investigation of the so called insurance case. First, it was decided that it was necessary to trace the cargo all the way from the manufacturer's plant to the insured. Secondly, to find out whether the insured and the consignee specified in the transportation contract had the right to work with alcoholic beverages. Thirdly, it is necessary to check whether the entire cargo has been destroyed as a result of the overturning of the truck.
Since the insured refused to provide the insurer with any additional documents, saying, "We'll talk in court," the insurer had to send inquiries to the Federal Republic of Germany, to the liquor manufacturer, to the customs authorities, and to the authorities that issued the excise stamps. The insurance company specialists were astonished when the manufacturer replied that the last batch of liquor had been shipped to Russia during the Soviet era. The customs office reported that the shipments of the liquor in question had never crossed the customs border of the Russian Federation. Moreover, it turned out that the insured did not have a license to handle alcoholic beverages and that the address from which the shipment was exported, according to the shipping contract, was occupied by organizations which had nothing to do with the trade or storage of alcoholic beverages. The same information was received regarding the recipient of the cargo.
Finally, the traffic policeman who signed the protocol of the accident, where it was indicated that the cargo was destroyed, said when questioned that he had looked into the back of the overturned truck and saw there were cardboard boxes with writing in a foreign language, traces of smudges and the smell of alcohol, and therefore he indicated that the cargo was destroyed. The insurer also was not lazy to get certificates from all waste disposal sites within 100 kilometers of the accident site that the insured did not dispose of the broken glass from them.
All of this in combination helped the insurer in the arbitration court to convince the judges that the claims of the insured to recover the insurance compensation were clearly not proven.
Unfortunately, this tactic does not always work. In particular, similar information obtained by the insurer (information of Kazakh manufacturer, indicated in the contract of transportation, that he does not produce the goods for more than 10 years, the lack of data on crossing the border of Russian Federation, the lack of contract for delivery of cargo to the insured, etc.) did not prevent the arbitrazh court of Chelyabinsk region still satisfy the claim of the insured to the insurer to recover from him insurance compensation for stolen cargo - 8 tons of drills for industrial purposes (by the way, the insurer even found out that the annual demand of the entire Russian industry for these drills is only five tons). Only when the insurer, with the help of outside lawyers, managed to get the General Prosecutor's Office of RF to transfer the case files on cargo theft from internal affairs bodies of Chelyabinsk region to another region of the country, the insured person offered the insurer a settlement - he received half of the sum that the arbitrazh court had collected in his favour, and forgave the insurance company the rest of the debt, and the latter stopped interfering in the course of so called investigation of the criminal case.
Therefore, other legal tools established by civil and criminal law should be used to protect against such behavior of insureds.
A criminal case can be initiated against an insured person committing certain fraudulent actions and sanctions provided by Articles 159.5, 303, 307 and 327 of the Criminal code of the Russian Federation can be applied. By the way we would like to notice that over the last 1.5 years insurance companies managed to achieve initiation of a number of criminal cases against auto lawyers who constructed criminal chains and used various criminal schemes in their activity.
As mentioned above, these articles do not cover every possible type of fraudulent action by an insured, but as a rule, fraudulent actions are accompanied by a violation of the terms of the insurance contract, and tools based on contract law can be used to protect the insurer. Although it must be said that the courts are listening to the arguments of insurers less and less frequently, giving unconditional priority to the protection of the interests of the insured (beneficiary).
Nevertheless, this does not mean that one should refuse to use all possible ways to protect the insurer from fraud. It is just important to understand that this requires more and more highly qualified specialists, more and more nontrivial ways of action.
The insurer has the right to demand compensation for losses caused by fraudulent behavior of the insured, and claim compensation for legal expenses (for example, the cost of examination and organization of witnesses), the cost of a representative in court.
When investigating insurance fraud related to reinsurance agreements it is even more important to involve lawyers in time, because the subject of the proof most often is not these or those factual circumstances of the event, but precisely the legal grounds for the claim. Lawyers can most skillfully determine which documents need to be requested from the reinsured or try to obtain from other reinsurers that had reinsured the same insurance portfolio before, or search the reinsurer's archives to see what facts need to be reinsured if the portfolio had been reinsured by the reinsurer in previous years.
The process of defending against fraudulent insurance claims under Russian law
Russian procedural law has no procedure for disclosing evidence to opponents. However, there are other tools available to prove a position in a dispute:
- to demand evidence from the person who possesses it, such as information from banks on accounts or information from state registries,
- to secure evidence that may be destroyed or lost,
- the judge is entitled to inspect and examine the evidence at its location,
- forensic examinations may be appointed,
- it is possible to involve specialists to clarify any questions and to interview witnesses,
- to use the clauses of the insurance contract on cooperation in the investigation of claims,
- use the institution of investigation in a criminal case to collect evidence for a civil claim.
We would especially like to emphasize that mediation with the participation of lawyers can be an effective way to resolve an existing dispute between parties to an insurance or reinsurance contract. This advice is most relevant in cases where there are outward signs of fraud on the part of the insured - a legal entity or reinsurer, the insurer or reinsurer still admits that the situation may be the result of an error, error or, at the very least, unfair or unprofessional actions of the insured (reinsured) employees, without the company management knowing about it.
Conclusions
Keep in mind that unsubstantiated accusations of fraud by an insurer of its client, when based only on suspicion, are perceived negatively by others. Insurance organizations should refrain from making sweeping statements on this subject.
At the same time, payments to insurance fraudsters negatively affects the financial condition of insurance companies, because according to experts, the total amount of such payments is up to 20% of the total payments of insurers under the insurance contracts.
Therefore, sometimes insurance or reinsurance companies make a principled decision that if, in the opinion of their experts, there is a sufficiently strong reason to suspect fraudulent actions by counterparties, they will deny insurance payout even if they have no prospects to prove their claim in court. This is done in order to make it as difficult as possible to implement fraudulent schemes, to make them as economically unprofitable for criminals. This principled approach deserves all possible support. But even in such a situation, it is advisable to obtain an objective opinion of independent lawyers to make the most informed managerial decision.
We do not question the qualifications of in-house lawyers of insurance organizations, but it is important to understand that they, like most other professionals working in one industry or another, eventually undergo a certain professional deformation of consciousness. Our experience shows that they, as well as other employees of insurance organizations, are initially ready to see almost anyone who has notified the insurance organization of the occurrence of an insured event as an intruder who wants to take the insurer's money. In addition, an uncompromising stance in case of even the slightest suspicion of insurance fraud is the most beneficial for an in-house lawyer - in this case no one will blame him for not caring about protecting the interests of the company where he works, and the fact that the court did not recognize the insurance fraud can always be explained by bias or unprofessionalism of judges. That is why it is advisable to seek the opinion of independent experts who can look at situations impartially, and therefore, as objectively as possible.
So that our thesis does not seem unconvincing, here is a very revealing, although not the most recent example. This story took place in 2009. A large federal insurance company signed a liability insurance contract under a state contract - a construction contract (until 2009 the legislation on procurement for state and municipal needs provided for insurance of contractual liability of contractors as one of the ways to financially secure the obligations of contractors under state and municipal contracts). The insured received an advance payment from the federal budget, but taking advantage of the fact that the customer had not yet provided him with the permits, decided to invest the advance money in another short-term entrepreneurial project. Unfortunately, this project was not implemented for him for objective reasons, and as a result, the advance was lost. As a consequence, the insured was also unable to proceed with the execution of the state order.
The client came to the conclusion that the insured event had occurred and filed a claim with the insurer for the payment of insurance compensation in the amount of the advance payment. The insurer rejected his claim stating that the insured event was clearly due to the intent of the insured. The customer, a federal agency, filed a complaint with the insurance supervisory authority. The insurer's management was invited there and the insurer's supervisory staff conveyed their opinion that there was no unequivocal evidence that the insured event had occurred as a result of the insured's intent. The insurer persisted in its position by submitting to the insurance supervisory authority the legal justification of in-house lawyers.
One of the authors of this article was invited to the insurance supervisory authority as an independent expert to evaluate the evidence and justification provided by the insurer. It must be said that at first glance it was obvious that the insurance company's experts drew the conclusion that the insured had committed fraud solely on the basis of mere suspicions, because there was no evidence that the insured had invested the advance amount in another project specifically for the purpose of creating the conditions for an insured event to occur.
The executives of the insurance company were summoned to the administrative commission of the insurance supervisory body, but even after that they refused to recognize the event as an insured event. Then the head of the insurance supervisory authority ordered a comprehensive inspection of the insurance company. Only after that the insurer recognized the fact of the insured event and paid the insurance compensation. The question (by no means rhetorical) is whether it was worth it for the insurer to insist on his delusion and run the risk of falling under the sanctions of the insurance supervisory authority.
Sergey Dedikov
Daria Zhdan-Pushkina
The main areas of insurance fraud
In the Russian Federation until recently, the main area of insurance fraud was hull insurance vehicles, which certainly led in the number of cases of fraud, but the amount of money that can get a fraudster on each such case is relatively small. At the same time, experts estimate that about 10% of the total payments under hull insurance contracts are payments to insurance fraudsters.
Quite often insurance fraud occurs in the insurance of cargo and goods in storage. However, statistics show that the number of insurance events under such insurance contracts increases surprisingly during economic and financial crises. There is nothing surprising in this. When consumer demand for goods drops, then their owners have a natural question, what to do with them next? Continue to keep them in storage, incurring all the associated costs and with no prospect of sale in the foreseeable future? The situation is considerably worsened if the goods were purchased on credit and the moment is approaching when the credit must be repaid. Therefore, there are more frequent fires in warehouses, when all the goods burn down, trailers with cargo disappear, etc.
It should be emphasized that the risk of insurance fraud in these types of insurance increases dramatically, if the insurer is willing to cover any theft of property, not only burglary, robbery or robbery, that is, cases of apparent unlawful taking of someone else's property. If the insurer has not included a burglary-only insurance clause in the insurance contract, there is a great risk that an unscrupulous property owner will try to compensate the insurance company for any shortage of property, even if it was caused by his employees, or he will sell such property himself and pass its absence off as the result of theft.
Insurance of precious metals and stones is dangerous from the point of view of insurance fraud, because here it is relatively easy to mislead an insurer by passing off a counterfeit as genuine jewelry.
There was a time in the history of Russian insurance, namely in the first half of the 90s when insurers made big insurance payments on certain categories of marine insurance contracts in almost 100 percent of cases. We are talking about situations when foreign companies and citizens bought scrap marine vessels, entered into towing contracts and pulled these vessels to ports in South-East Asia, Bangladesh, India. Almost always owners of purchased scrapped ships insured them in case they were lost en route. Russian insurance companies, not very experienced in the matters of insurance fraud at that time and having stung on rather large sums of insurance premiums easily entered into such insurance contracts. If the sum insured under such insurance contracts was comparable with the profit the owner of a decommissioned ship could get from scrapping it, such ship would inevitably sink as soon as it left Russian territorial waters. And really, what is the sense in towing the ship to a distant port, hiring shipyards, a team of workers to cut the hull, engine and other metal accessories, transporting scrap metal to collection points, when in fact the same amount could be received directly from the insurer?
In today's insurance history of Russia among the leaders in cases of insurance fraud confidently goes compulsory insurance of civil liability of vehicle owners (OSAGO/CMTPL). In this case insurance fraud is associated not so much with staging an insured event, but with the use of established judicial practice in disputes arising from insurance contracts. Since the number of disputes under insurance contracts has for many years been the largest share of court disputes in general, the courts have almost always satisfied the claims of policyholders or beneficiaries. This makes it possible for specialists, called auto lawyers, to make extensive use of such a situation. Some of them not only help the injured party to get from the insurers of CMTPL policy full compensation for damages plus the sanctions provided by the legislation on compulsory insurance and on the protection of consumer rights, but also build fraud schemes to earn on this significant money. In such schemes involve employees of the traffic police, appraisers and even judges. After that, the car lawyers purchase from the victims their rights of claim against the insurers, and, tellingly, sometimes at a price that exceeds the amount of the loss, ensure the execution of documents, according to which the amount of damage increases significantly, and create a situation in which the court has all the grounds to recover from the insurance company a penalty for delayed payment of insurance compensation, a fine for refusing to settle the dispute in pre-trial order, compensation for moral damage.
As a peculiar insurance fraud should be qualified as a message by the insured to the insurer in the insurance transaction untrue or incomplete information about the essential terms of insurance, which occurs, incidentally, quite often because of the desire of policyholders to save on insurance premiums.
Insurance fraud in reinsurance is specific. Firstly, dishonest insurance companies act as fraudsters here. Secondly, since it is a sphere of professional relations, the methods of insurance fraud are specific. For example, obligatory treaty reinsurance contracts in Russia result in higher loss ratios (ratio of indemnities paid to reinsurance premiums received) on average than in facultative reinsurance by 15-20% mostly thanks to the so-called antiselection of risks. An unscrupulous insurer-reinsurer does not cede all risks that he was obliged to cede under the relevant contract, but selects from them those that he considers the most dangerous. Those risks that he assesses as less dangerous, i.e. which in his opinion have less chances to occur as an insured event, he does not include in the list of reinsured risks (premium bordereau) in time and therefore does not pay a reinsurance premium for them. Such risks are included in premium bordereau and losses bordereau only when insured event occurs. This practice leads to the fact that the amount of reinsurance premium due to the reinsurer is artificially reduced compared to what he originally expected, but he is obliged to participate in the payments on all insured events.
The second quite widespread method is that in the loss bordereau the reinsurer twice includes the same insured events or insured events, claims on which the reinsurer has paid earlier. The fact is that reinsurance contracts usually have the so-called "cash loss" clause, by virtue of which the reinsurer makes payment outside the normal settlements between the parties to the transaction and, as a rule, much faster. So the unscrupulous reinsurer includes these already settled insured events under the contract of obligatory reinsurance in the next loss bordereau and deducts the appropriate amount of insurance compensation from the reinsurance premium again.
There are cases when the bordereau of losses includes information on such insured events that do not fall under the scope of the reinsurance contract.
One of the most dangerous methods of insurance fraud for reinsurers in reinsurance relations is the provision by the reinsured to the reinsurer, with the intention to enter into a contract of non-proportional reinsurance, incomplete statistical data on its insurance portfolio and, most importantly, on the number of insurance events and the amount of insurance compensation paid and payable. All this is necessary for the reinsurer in order to determine the amount of reinsurance premium, which should be sufficient to cover the upcoming insurance payments under the reinsurance contract, the cost of the reinsurer's business and ensure its planned profitability. If the information about the amount of insurance payments on the reinsured insurance portfolio is understated, the reinsurer will receive less reinsurance premium, but will have to participate in its share of all insurance payments, which will inevitably lead to unprofitability of this reinsurance contract. For example, for one obligatory reinsurance contract the reinsurer underreceived the reinsurance premium in the amount equivalent to $1.2 million, and the insurance indemnity payments on it eventually exceeded the premium received by the amount exceeding the equivalent in US dollars by one million.
Sometimes unscrupulous reinsureds deliberately delay transferring reinsurance premiums to reinsurers, earning on them investment income for the time of delayed payment.
Finally, there may be collusion between the insured under the main insurance contract and the insurer - reinsured in order to get money from the reinsurer. This can be the preparation of documents about the insured event under the insurance contract, which in reality did not happen, or in order to overstate the amount of the loss. Sometimes the insurer, for one reason or another, interested in maintaining relations with an unscrupulous insured, without even a superficial investigation, immediately recognizes some event as an insured event, which makes it very difficult for the reinsurer to protect its interests, because the courts when considering disputes under reinsurance contracts almost never go into the question of whether there actually was an insured event under the main insurance contract, especially if the insurer admitted the existence of the insured event.
The concept of a fraudulent claim under Russian law
There is no concept of a fraudulent insurance claim in Russian law.
Fraud in insurance is defined in Article 159.5 of the Criminal Code of the Russian Federation as theft of another's property by deception regarding the onset of an insured event, as well as the amount of insurance compensation payable under the law or contract to the insured or another person. Forgery, production or sale of counterfeit documents, state awards, stamps, seals, letterheads is a criminal offence under Article 327 of the Criminal Code of the Russian Federation. Criminal offenses are also recognized as falsification of evidence in a civil case by a person involved in the case or his representative (paragraph 1 of Art. 303 of the Criminal Code), as well as knowingly false testimony of a witness, victim or expert opinion or testimony, expert testimony, as well as knowingly incorrect translation in court or during the preliminary investigation (paragraph 1 of Art. 307 of the Criminal Code).
In practice, fraudulent actions of the insured may manifest itself in deception regarding the fact and causes of the event declared as an insured event, in increasing the amount of losses and in falsification of evidence attached to the insurance claim, as well as in concealment of circumstances affecting the change in the content of the insurance claim. However, there is no special regulation of such cases in civil law.
As for the intentional actions of the insured aimed at the organization of the insured event, this issue is resolved in Art. 963 of the Civil Code of RF, and such actions exempt the insurer from the insurance payment, but the difficulty is that the intent must be proved so certainly that the court has not even the slightest doubts about it.
Pre-assessment of an insurance claim
At what point does an insurer's in-house lawyer, much less an outside lawyer, get involved? The answer, unfortunately, is the following: "It's usually too late." We are not saying that in this scenario, the case has no prospects, but it should be taken into account that the work of the lawyer is more complicated, because he begins to influence the situation, when the conflict with the insured (beneficiary) is in full swing.
Collecting and systematizing evidence for the court is a more complex process than the same work at the pretrial stage, because a lawyer reviewing a claim with evidence of fraud has to use not only arguments related to fraud, but also other arguments, such as:
- violation of the terms of the entry into force of the contract,
- misrepresentation and concealment of information prior to the commencement of the contract,
- violation of the essential terms of the contract,
- breach of obligations following from the principle of good faith,
- exaggerated claim amounts.
Some arguments - especially those involving the highest good faith principle, misrepresentation, concealment of circumstances and breach of material terms may be easily lost due to the insurer's subsequent conduct.
A qualified attorney assigned to handle a fraud case will analyze the totality of the circumstances based on the information available and assess what types of defenses could potentially be used. It is extremely rare in our practice that a position based solely on anti-fraud can be used.
Collection of evidence and remedies for insurer's legal defense of fraudulent claims
Russian courts have a very high standard of proof, so the maximum amount of evidence must be gathered prior to trial. In accordance with Russian arbitration and civil procedure law, each party must prove the circumstances to which it refers in its claims.
Generally, this means that the insurer should investigate prior to the civil dispute, conduct the necessary inspections, interview witnesses, and conduct expert examinations, when necessary, prior to taking the case to court.
Russian law does not provide special regulation for fraudulent insurance claims. An insurer cannot withdraw from an insurance contract solely on the grounds that the policyholder has filed a fraudulent claim.
The Supreme Court of the Russian Federation has formulated a legal position according to which the insurer's denial of insurance payment can follow only on those grounds that are specified in the law. Although for the area of arbitration justice is allowed to relax in the form of the possibility of inclusion in the insurance contracts and other grounds for denial of insurance payout, but in general the courts in this case, too, most often side with the insured or beneficiary.
It should be emphasized that Russian law contains no provisions for liability of the parties to a dispute for unreasonable statements and giving false explanations. Consequently, the maximum that may occur in such situations is a refusal to pay on the grounds that the insured or the beneficiary has not proved the validity of his claim.
The insurer's statement on the failure to prove the claims of the insured (beneficiary) alone is not enough to deny the insurance payout. It is necessary in all cases to collect the widest possible range of evidence, confirming directly or indirectly the insurer's conclusion.
So, if there is a suspicion of insurance fraud in case of fire in a warehouse, it is important to collect documents confirming the fact that there were no relevant goods in the warehouse at all or their quantity was significantly less than declared, or when it comes to goods with a certain shelf life, about the expiry of this period at the time of the fire. For example, if the insured claims that imported goods were stored in the warehouse, it is necessary to obtain documents confirming that these goods were legally imported into the territory of the Russian Federation. If the insured is unable to provide supply contracts, invoices with a customs stamp, then this will at least indirectly indicate that it is likely that such goods were not in the warehouse or were smuggled into the territory of Russia.
It was this tactic that allowed the insurer who had insured the goods in the warehouse and in the sales areas to win a dispute in court over the insured's claim for insurance compensation. The insured was the owner of several clothing stores in Vladivostok. She had insured goods in the warehouses and sales areas of all of these stores. At one of them she claims the goods were stolen. An inspection of the scene of the theft revealed the following. The warehouse was in the basement of a house. Above the warehouse was a clothing store. Above the store was the insured's apartment. The criminals broke into the policyholder's apartment while her family was away, made a hole in the floor, and thus entered the store and the warehouse. According to the policyholder's statement, a significant amount of Chinese furs were stolen, and the thieves, in order to cover up the traces of the crime, disrupted the water supply system, which caused the storage room to be partially flooded.
When the insurer demanded documents confirming the purchase of the furs in China and their clearance, the insured was unable to do so, stating that all documents relating to the stolen goods had been destroyed in the flooding of the premises. However, the report of the inspection of the scene did not record any remains of paper documents. In addition, the insurer was able to obtain documents showing that the insured had recently experienced financial difficulties, as its trade volume had significantly declined. All these facts gave the insurance company grounds to refuse to pay the indemnity because the insured had not proved the existence and extent of the loss. Arbitration courts, where the insured filed a claim for insurance compensation, supported the position of the insurance company.
Another example is even more telling. An insurance company from Moscow had insured a cargo of alcoholic beverages, namely, German liquor, which was being transported from Moscow to Izhevsk. On the way, the truck overturned and as a result the cargo was destroyed as indicated in the GIBDD report.
The insurer suspected insurance fraud. The insurance company's security service headed the investigation of the insurance case in this connection. The employees of this service set as their main task to achieve initiation of the criminal case on the fact of fraud, as cargo loss as a result of fraudulent actions was an exclusion from the insurance coverage.
Unfortunately, the insurer's efforts in this direction did not lead to the desired result because of the opposition of the insured. If an investigator initiated a criminal case for fraud, the prosecutor reversed the ruling. And it went on like that for about a year. According to the security service of the insurance organization the insurer was opposed by an organized criminal group, specializing precisely in insurance fraud.
In such a situation the insurer's management finally came to a conclusion that it was necessary to involve lawyers both from inside and outside, taking into consideration that the insured would hardly be able to avoid going to arbitration court with a claim for recovery of insurance compensation.
At the joint meeting of all interested specialists there was worked out a tactic of further investigation of the so called insurance case. First, it was decided that it was necessary to trace the cargo all the way from the manufacturer's plant to the insured. Secondly, to find out whether the insured and the consignee specified in the transportation contract had the right to work with alcoholic beverages. Thirdly, it is necessary to check whether the entire cargo has been destroyed as a result of the overturning of the truck.
Since the insured refused to provide the insurer with any additional documents, saying, "We'll talk in court," the insurer had to send inquiries to the Federal Republic of Germany, to the liquor manufacturer, to the customs authorities, and to the authorities that issued the excise stamps. The insurance company specialists were astonished when the manufacturer replied that the last batch of liquor had been shipped to Russia during the Soviet era. The customs office reported that the shipments of the liquor in question had never crossed the customs border of the Russian Federation. Moreover, it turned out that the insured did not have a license to handle alcoholic beverages and that the address from which the shipment was exported, according to the shipping contract, was occupied by organizations which had nothing to do with the trade or storage of alcoholic beverages. The same information was received regarding the recipient of the cargo.
Finally, the traffic policeman who signed the protocol of the accident, where it was indicated that the cargo was destroyed, said when questioned that he had looked into the back of the overturned truck and saw there were cardboard boxes with writing in a foreign language, traces of smudges and the smell of alcohol, and therefore he indicated that the cargo was destroyed. The insurer also was not lazy to get certificates from all waste disposal sites within 100 kilometers of the accident site that the insured did not dispose of the broken glass from them.
All of this in combination helped the insurer in the arbitration court to convince the judges that the claims of the insured to recover the insurance compensation were clearly not proven.
Unfortunately, this tactic does not always work. In particular, similar information obtained by the insurer (information of Kazakh manufacturer, indicated in the contract of transportation, that he does not produce the goods for more than 10 years, the lack of data on crossing the border of Russian Federation, the lack of contract for delivery of cargo to the insured, etc.) did not prevent the arbitrazh court of Chelyabinsk region still satisfy the claim of the insured to the insurer to recover from him insurance compensation for stolen cargo - 8 tons of drills for industrial purposes (by the way, the insurer even found out that the annual demand of the entire Russian industry for these drills is only five tons). Only when the insurer, with the help of outside lawyers, managed to get the General Prosecutor's Office of RF to transfer the case files on cargo theft from internal affairs bodies of Chelyabinsk region to another region of the country, the insured person offered the insurer a settlement - he received half of the sum that the arbitrazh court had collected in his favour, and forgave the insurance company the rest of the debt, and the latter stopped interfering in the course of so called investigation of the criminal case.
Therefore, other legal tools established by civil and criminal law should be used to protect against such behavior of insureds.
A criminal case can be initiated against an insured person committing certain fraudulent actions and sanctions provided by Articles 159.5, 303, 307 and 327 of the Criminal code of the Russian Federation can be applied. By the way we would like to notice that over the last 1.5 years insurance companies managed to achieve initiation of a number of criminal cases against auto lawyers who constructed criminal chains and used various criminal schemes in their activity.
As mentioned above, these articles do not cover every possible type of fraudulent action by an insured, but as a rule, fraudulent actions are accompanied by a violation of the terms of the insurance contract, and tools based on contract law can be used to protect the insurer. Although it must be said that the courts are listening to the arguments of insurers less and less frequently, giving unconditional priority to the protection of the interests of the insured (beneficiary).
Nevertheless, this does not mean that one should refuse to use all possible ways to protect the insurer from fraud. It is just important to understand that this requires more and more highly qualified specialists, more and more nontrivial ways of action.
The insurer has the right to demand compensation for losses caused by fraudulent behavior of the insured, and claim compensation for legal expenses (for example, the cost of examination and organization of witnesses), the cost of a representative in court.
When investigating insurance fraud related to reinsurance agreements it is even more important to involve lawyers in time, because the subject of the proof most often is not these or those factual circumstances of the event, but precisely the legal grounds for the claim. Lawyers can most skillfully determine which documents need to be requested from the reinsured or try to obtain from other reinsurers that had reinsured the same insurance portfolio before, or search the reinsurer's archives to see what facts need to be reinsured if the portfolio had been reinsured by the reinsurer in previous years.
The process of defending against fraudulent insurance claims under Russian law
Russian procedural law has no procedure for disclosing evidence to opponents. However, there are other tools available to prove a position in a dispute:
- to demand evidence from the person who possesses it, such as information from banks on accounts or information from state registries,
- to secure evidence that may be destroyed or lost,
- the judge is entitled to inspect and examine the evidence at its location,
- forensic examinations may be appointed,
- it is possible to involve specialists to clarify any questions and to interview witnesses,
- to use the clauses of the insurance contract on cooperation in the investigation of claims,
- use the institution of investigation in a criminal case to collect evidence for a civil claim.
We would especially like to emphasize that mediation with the participation of lawyers can be an effective way to resolve an existing dispute between parties to an insurance or reinsurance contract. This advice is most relevant in cases where there are outward signs of fraud on the part of the insured - a legal entity or reinsurer, the insurer or reinsurer still admits that the situation may be the result of an error, error or, at the very least, unfair or unprofessional actions of the insured (reinsured) employees, without the company management knowing about it.
Conclusions
Keep in mind that unsubstantiated accusations of fraud by an insurer of its client, when based only on suspicion, are perceived negatively by others. Insurance organizations should refrain from making sweeping statements on this subject.
At the same time, payments to insurance fraudsters negatively affects the financial condition of insurance companies, because according to experts, the total amount of such payments is up to 20% of the total payments of insurers under the insurance contracts.
Therefore, sometimes insurance or reinsurance companies make a principled decision that if, in the opinion of their experts, there is a sufficiently strong reason to suspect fraudulent actions by counterparties, they will deny insurance payout even if they have no prospects to prove their claim in court. This is done in order to make it as difficult as possible to implement fraudulent schemes, to make them as economically unprofitable for criminals. This principled approach deserves all possible support. But even in such a situation, it is advisable to obtain an objective opinion of independent lawyers to make the most informed managerial decision.
We do not question the qualifications of in-house lawyers of insurance organizations, but it is important to understand that they, like most other professionals working in one industry or another, eventually undergo a certain professional deformation of consciousness. Our experience shows that they, as well as other employees of insurance organizations, are initially ready to see almost anyone who has notified the insurance organization of the occurrence of an insured event as an intruder who wants to take the insurer's money. In addition, an uncompromising stance in case of even the slightest suspicion of insurance fraud is the most beneficial for an in-house lawyer - in this case no one will blame him for not caring about protecting the interests of the company where he works, and the fact that the court did not recognize the insurance fraud can always be explained by bias or unprofessionalism of judges. That is why it is advisable to seek the opinion of independent experts who can look at situations impartially, and therefore, as objectively as possible.
So that our thesis does not seem unconvincing, here is a very revealing, although not the most recent example. This story took place in 2009. A large federal insurance company signed a liability insurance contract under a state contract - a construction contract (until 2009 the legislation on procurement for state and municipal needs provided for insurance of contractual liability of contractors as one of the ways to financially secure the obligations of contractors under state and municipal contracts). The insured received an advance payment from the federal budget, but taking advantage of the fact that the customer had not yet provided him with the permits, decided to invest the advance money in another short-term entrepreneurial project. Unfortunately, this project was not implemented for him for objective reasons, and as a result, the advance was lost. As a consequence, the insured was also unable to proceed with the execution of the state order.
The client came to the conclusion that the insured event had occurred and filed a claim with the insurer for the payment of insurance compensation in the amount of the advance payment. The insurer rejected his claim stating that the insured event was clearly due to the intent of the insured. The customer, a federal agency, filed a complaint with the insurance supervisory authority. The insurer's management was invited there and the insurer's supervisory staff conveyed their opinion that there was no unequivocal evidence that the insured event had occurred as a result of the insured's intent. The insurer persisted in its position by submitting to the insurance supervisory authority the legal justification of in-house lawyers.
One of the authors of this article was invited to the insurance supervisory authority as an independent expert to evaluate the evidence and justification provided by the insurer. It must be said that at first glance it was obvious that the insurance company's experts drew the conclusion that the insured had committed fraud solely on the basis of mere suspicions, because there was no evidence that the insured had invested the advance amount in another project specifically for the purpose of creating the conditions for an insured event to occur.
The executives of the insurance company were summoned to the administrative commission of the insurance supervisory body, but even after that they refused to recognize the event as an insured event. Then the head of the insurance supervisory authority ordered a comprehensive inspection of the insurance company. Only after that the insurer recognized the fact of the insured event and paid the insurance compensation. The question (by no means rhetorical) is whether it was worth it for the insurer to insist on his delusion and run the risk of falling under the sanctions of the insurance supervisory authority.
Sergey Dedikov
Daria Zhdan-Pushkina
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