In the trade it was called a letter shop: a facility for large-scale bulk mail presorting and printing of direct mail advertising. From all appearances, business was very good. The insured had leased a new 24,000-square-foot building, purchased a $10,000 sign, acquired four new vehicles and invested in mahogany office furniture, high-speed letter sorting equipment and tons of computers. The insured also leased a high-powered computer the size of a side-by-side refrigerator, an IBM AS-400. It was all very impressive. Outwardly, it was the kind of firm pictured in business advertising: with smiling, uniformed employees posed next to new trucks parked in front of the firm's new plant. Business was about to increase substantially due to a contract with the U.S. Postal Service. How the insured acquired that contract was one of the many questions that arose following the loss.
The agent was aware of the insured's apparent success and for several months encouraged the insured to increase coverage limits, but his repeated appeals went unheeded. In three and a half years, only one loss was reported: a $3,300 emergency power supply had been dropped during the move into the new plant and the insurer quickly settled the loss. Then, a courier appeared at the agent's office with a package (thereby avoiding using the mail) containing the insured's inventory of business personal property with a request to more than double the business personal property limit. That same day, the agent received a call from the insured not just asking, but insisting, that he call IBM to determine what would be paid if the AS-400 were stolen. (The IBM lease included separate insurance with a different insurer.) Ten days later the insured reported the plant had been burglarized, resulting in a loss of $227,000 in computers, office furniture, and letter-handling equipment; $64,000 in IBM software and manuals not covered by the IBM lease; and the AS-400, worth $250,000. A $120,000 business interruption loss was later claimed, bringing the total loss to more than $660,000. Forklifts, semi-tractors and trailers would have been required to haul the booty off.
The obvious red flags triggered an in-depth investigation. Six days after the loss an adjuster/investigator met with the insured at the loss location. The insured introduced her ex-husband, describing him as a postal supervisor at one of the largest post offices in the city. She added that they were still living together but obtained a divorce to circumvent postal regulations prohibiting nepotism.
A non-waiver agreement was obtained, then a recorded statement. During the recorded interview and a cursory review of the invoices, the insured was asked why the invoices listed three different firms as purchasers. The insured reported that her attorney recommended creation of other corporations for tax purposes, but added if clients were unhappy with their service, they could take their business to another letter shop located across the street, which, unknown to the client, she also owned.
This information raised questions as to whether the insured had insurance covering the other corporations.
The insured was prepared to submit her claim with an inventory of 56 items and a two-inch thick stack of invoices. She confirmed that everything on the list was stolen and that the burglars damaged nothing. Because the insured reported that some of the property was in the offices and some was in the warehouse, she was asked to mark the items on the inventory with a "W" or "O."
The insured agreed to a videotaped tour of the plant. On this tape, a number of pieces of equipment and software were plainly visible: a rented copier, which took the place of the stolen copier, according to the insured; telephones, mahogany desk and matching sideboard in the manager's office; a computer that the insured said was leased to replace a stolen computer; Novell manuals; emergency power supply; Overland tape drive; IBM software programs and operating instructions; high-speed laser printers and computers; a $12,000 electronic letter scale.
Back at the office, the inventory was studied more carefully. Strange as it seems, many items on the claim inventory appeared to be still at the business. Another meeting was arranged to inspect and inventory what remained on the premises. The insured then modified her claim by stating some of the laser printers were not stolen but were damaged by the burglars. Over the next few days every item in the plant was inspected, identified, photographed and listed.
The vendors were contacted to obtain serial numbers. The items on the claim inventory were compared with those on the inspection inventory. Almost $100,000 of property claimed on the loss report was found on the premises but the insured was not supplied that information. The $3,300 power supply claimed in the prior loss was also found operating under the red Novell program manuals.
The insured requested a $25,000 advance payment but her request was denied pending further investigation.
The production manager was interviewed and asked whether certain items had been stolen. He said that nothing on the list had been stolen and some of the property, such as the mahogany furniture, had never been in the warehouse. He later became an informant and advised that some of the property claimed to be stolen was sold to another letter shop five months prior to the "burglary" and the copier in the reception area h.1d been replaced by a newer unit before the "burglary." He also testified that the insured ordered employees to hide equipment, including the tape drive worth $10,000, in company vans prior to inspections. The insured asked this individual for an affidavit affirming she had no knowledge of the sale of the equipment but he refused to lie under oath.
Another employee, the insured's computer expert and hardware supplier, testified under oath that he sold the insured most of the computer equipment and software listed on the claim and that every item but one, an NEC motherboard, was still on the premises. The motherboard had been shipped to NEC for repairs prior to the burglary.
The post loss inventory and informant's testimony established that about $167,000 of the property, or approximately 73 percent of the $230,000 claimed, was in plain sight on the premises or was otherwise accounted for.
Further investigation established that at the time of the alleged loss, more than $70,000 in accounts payable was due and included lease payments on the building and the IBM AS-400, county business personal property taxes and other obligations. A check of civil court records turned up a vendor lawsuit against the insured for breacl1 of contract. The plaintiff was contacted and confirmed that just two weeks prior to the burglary, $10,000 was offered by the insured to settle the dispute.
Agents from the U. S. Postal Service eventually shut the business down by confiscating the mailing equipment. The production manager testified that a stolen "bopper" (stamp used to certify mailing certificates) was used to falsify the number of pieces mailed to increase the income of the insured business. Defense counsel was involved from the beginning and provided advice and direction, conducted examinations under oath and requested books and records. The entire claim was denied, suit was filed and the mailer was finally resolved with a dismissal with prejudice and sanctions against the imured for her failure lo respond to discovery.
First impressions can be deceiving, but questionable business losses, large and small, occur everyday. It is important for claim professionals to recognize possible fraudulent claim activity and take creative steps to investigate thoroughly.
- The business has several prior losses.
- Losses occur after recent increases or changes in coverage.
- The loss mvolves large quantities of equipment or property requiring special equipment to transport.
- The partners or owners are embroiled in a business dispute.
- A large amount of cash has accumulated on the premises when deposits normally are made every day.
- The alarm system was not activated on the date of loss.
- Do an inventory and audit of the personal property remaining, especially if the insured has an extensive loss history with the current insurer or with prior insurers.
- Do a loss history investigation on ISONet Claimsearch (PILR).
- Identify prior insurers/claims and audit lhose files. Look for identifiable property claimed on the current loss.
- Verify the purchase or acquisition of the property reported stolen or destroyed.
- Determine whether any of the claimed property has been repossessed, sold, traded in for new equipment or returned to vendors. Check the UCC (Uniform Commercial Code) filings with the Secretary of State to identify creditors.
- Contact current and previous employees to verify the existence of the claimed property and to verify the insured's representations.
- Check public records, such as civil court records, county tax records and county recorder's records for tax liens, judgments, chattel mortgages, and so on.
- Use defense counsel to conduct further investigation, such as an examination under oath and make formal requests for books and records.