Finding and Monitoring Fraud in Claims

With large service providers paying out thousands of claims per month, claims fraud has always been an issue in the auto industry. “Unfortunately, so much of the public knows so little,” says George Krnich, vice president of claims and risk management, American Auto Guardian, Inc., “that it is often easy for a repair shop to tell them that there are repairs that they really don’t need.”

With the exception of the US Fidelis debacle, fraud is typically not an issue of large providers failing to pay out valid claims; rather, it most often lies with dealers, service departments and repair shops exaggerating claims. While the majority operates with integrity, there are always some who take advantage of the system and, according to those we spoke with, there are many ways in which they do so.

Steve Pearl, president, The Oak Group, says, “If fraud were the norm, no one would be in the underwriting business. Dealers who consciously commit fraud signify less than 1%, but the cost skews the losses.”

Providers we spoke with said they had never had a situation escalate to the point of actually having to bring charges against anyone for fraud. When fraud is suspected, common practice seems to be for the provider to first alert the agent and allow them to work with the dealer to resolve the issue. “If they work with us,” says Krnich, “then identifying the problem is the first step. The agent and dealer talk to the people involved. After that, the dealership may give us a discount on certain things as a means of restitution - to get their numbers down and so they look profitable again.”

Krnich listed several steps that are key to identifying and preventing fraud:

• Properly train the claims adjustors
• Invest in software and resources to quickly verify part pricing and labor times
• Quality reporting software
• Intensive training for the risk management personnel who dissect info and extrapolate data to properly analyze the dealers

Dave Robertson, executive director of the Association of Finance & Insurance Professionals, (AFIP), pointed out that it is not legal for a dealer to sell an extended warranty of any type; they can only sell service contracts and must refer to them as such. He believes that one of the best things a provider can do to guard against fraud is to create a situation where the dealer participates in the underwriting process, so if he controls his losses, he can make more money on the program. “I did that with my own program in the past. If I could get the dealer in bed with me – so to speak – then I wouldn’t have them reconditioning used cars on me.”

“No one wants to have the reputation as ‘the provider who sues their dealers,’” says Ganther, “Providers are in the claims management business and they have to manage claims in real time. They have to be willing to put up with [fraud] to a certain extent, so where do they pull the plug?

“The effect of the recent improving car market is 25-30% fewer dealers than a few years ago and more cars are being sold,” says Ganther, “Everyone is breathing a bit easier now. Dealers were fighting for their lives a few years ago. The temptation to use their service provider as a piggy bank is much less today than it was then.” Ganther says he recently spoke with the president of a large provider at NADA who said, “If you are not making money in this market, you need to be in another line of work.”

An Industry-Wide Watch List?

There are many ways fraud is dealt with, depending on the circumstances and severity. “Basically the claim would be denied and, in some instances, if there is an ongoing trend, the stores could be cancelled from the program, or they are added on to our [internal] watch list,” says Rhonda Chaplin, claims manager, NWAN.

Large providers may have their own internal “watch list” for dealerships and repair shops who seem a bit shady or are known to have been fraudulent, but how about the communication between providers with this information? On what level is it okay for them to share names of dirty dealers with another provider? According to Ganther, some years back there was talk of creating an industry wide list of fraud perpetrators, for the good of the industry. It sounded like a great idea at first, but ultimately, no one was willing to get his or her hands dirty by being responsible for contributing to or maintaining the list. There was also the question of the legality of it. And, once someone was on the list, what did they have to do to get off the list? Say for example there was a change in management. Nothing came of it in the end, but it is still a topic some consider worth talking about.

No doubt, fraud is a reality and all service providers have their own processes in place to deal with it. Certain companies, however, made it clear that it was not something they wanted to discuss. One company referred to their methods of dealing with fraud as “proprietary and confidential practices” and more than one company declined discussing the topic at all in an interview or even went as far as saying that fraud was not an issue for them. It seems providers could be afraid of losing their edge in catching fraudulent practices by revealing their methods to the public.

Ganther pointed out that when one provider finally drops a dealership for fraudulent practices, there is always another agent who will be right there willing to pick it up. “The agent has the incentive of getting commission and they may not have the exposure to the downside of working with a fraudulent dealer.” So, there is always a revolving door and the cycle continues.

Types and Detection

With the option of filing claims online, could the need for initial verbal communication with the service contract administrator eventually become a thing of the past? Would filing a claim online, as opposed to with a person over the phone make it easier to commit or get away with fraud because it is easier to lie to a computer than a person? The answer may not be what you expected.

Chaplin says she does not foresee this becoming a problem. “In our experience, the means in which the claim is started doesn’t have an impact on the validity of the claim itself. Typically we will still speak with the customer or repair facility at some point, prior to the claim being approved. Given the way that our process is designed, we see a higher volume of calls than we do fax or email claims. It tends to be more efficient for the facility. We are moving towards shifting the percentage towards a higher volume of electronic claims with new developments with our administration system. This should make it just as, if not more, efficient for the repair facility.”

Krnich, on the other hand, says that adjudicators are skilled in reading the subtle cues when speaking to someone over the phone, and picking up if something just does not sound right. While currently, all of their claims are handled over the phone, he said eliminating the personal contact could lend itself to eliminating that critical part of fraud detection. Currently, they only have a means for excessive wear and tear (EWT) claims to be filed online, and Krnich says he does not predict that changing anytime soon

Following up with a customer in an interview, in order to get an accurate recounting of events leading to the repair can be crucial in determining the details of a claim. Chaplin says that often, if you call a customer shortly after the claim in question was filed, then “the flood gates will open.” The customer likely has not had a chance to be “coached” or prompted by the repair facility, an advisor or technician and the customer just wants to get their vehicle repaired.

Chaplin said that while you hate to say you are looking for fraud, you always want to be mindful of it, looking at each claim from beginning to end, “Sometimes it is obvious, other times you have to dig a little deeper… If you ask all the questions and it turns out that the answers are right, then wonderful - you have done your due diligence and you can more on.”

Krnich agreed. He said often it is almost blatant. “Fraud can be detected when a repair facility or technician says the wrong things, or they try to charge for 10 hours of labor when a repair actually takes only 7 hours. They forget that we have the resources to know how long a repair takes.”

“There are just a few bad apples out there and the good people have to pay for what the bad people do,” added Pearl.

Common Scenarios

Fraud can run the gamut from a repair shop trying to get a few more dollars on a repair to larger, more costly trends within a dealership. One commonly seen scenario is a new vehicle owner bringing their vehicle to the repair shop, reporting a problem that occurred within days of entering the contract, or even on the way home from the dealer after purchasing a preowned vehicle. In these cases, the dealer who sold the vehicle might be committing fraud – especially if this is a pattern with newly purchased preowned vehicles. If the dealer was aware of a problem with the vehicle but purposefully did not make a needed repair prior to the sale, knowing it would be covered under the customer’s newly purchased service contract, they commit fraud. Some are as blatant as a dealer not properly reconditioning a vehicle but throwing in a limited warranty or service contract with the sale and telling the customer that it will cover a needed repair as soon as they purchase the vehicle. Situations of this nature tend to only be detected when they run in trends at a given dealership.

The easiest thing for an administrator to do is to cancel the dealer, according to Robertson, but if in many cases, if they work with the dealer on procedures on how to effectively use the program, an account can be salvaged, resulting is a reasonable claims level. “I once had a dealer who had extremely high claims, so I sent my representative out. They determined that the dealer did not have enough service advisors to adequately handle the customers. When customers would come in, instead of taking the time to assess the situation, they would just file a service contract claim. My rep suggested they hire a few more service advisors and in doing so, the claims frequency went down significantly and we salvaged the situation.”

Another common scenario occurs when someone has traded a vehicle in and they are no longer the owner. The service department could try to take advantage of the situation and file a claim on the vehicle, knowing that the customer covered by the contract is no longer the owner, but not reporting the sale, in order to get the repair paid for under the customer’s service contract.

Ganther noted a situation that is usually not detected until it shows up in the loss ratios. A disreputable dealer could sell and backdate service contracts in the service drive in order to cover a costly repair. The repair would then be post dated in order to comply with the terms of the contract. Also, he stated that service managers sometimes view a contract as an invitation to see what is covered, in addition to the repair a customer brought the vehicle in for. They tell the customer that they found and will take care of an additional problem. The customer usually does not mind, or may even be appreciative and the mechanic makes more money by charging for unnecessary repairs, knowing they will be covered by the service contract.

Our claims experts agreed that staying on top of things comes down to having good communication and detailed reporting. “Putting good processes in place, training associates on what to look for, doing customer interviews, asking additional questions and keeping your eyes open,” are all key according to Chaplin.

Chaplin added that monitoring trends in an important part of detecting fraud. “We look at trends with facilities – do they do an overabundance of a particular type of claim? Or maybe they have a lot of claims that are right out of the gate – claims within the first few days of contract entry. We look at things like a particular advisor or technician being involved regularly in a certain type of claim. My team is really good about noticing trends as they do several claims with a particular repair facility. We do loss ratios on a monthly basis. If anyone has a high loss ratio, we look at those a little bit closer and we can send out an inspector a little more often.”

Krnich described a similar process used by his company and noted that the type of vehicle a dealer sells will dictate their loss ratios to some degree. “We have software and other means in place to analyze what loss prevention ratios should be. If the ratio has typically been 70% then jumps to 95% one month, then we will begin monitoring them more closely. It could be fraud, or it could just be that they had two large claims that month that caused the change.

“If you are abusing the system,” Krnich concluded, “eventually over time, it will show.”