Not as Interesting As I Want It To Be
In the world of insurance accounting, there are few things that annoy me more than a fraudulent claim. All it does is waste time and effort that could better be spent evaluating claims with merit.
The biggest problem with submitting a claim that has no merit is that, in order for the insurance company to pay you, you have to prove you had a loss. In my office, there are specific things we ask for to prove that loss, such as financial statements and tax returns. If you fail to provide these things, and you have them, your claim can automatically be denied for failure to show your records to the insurance company. This is called a 'policy defense' which is anything in the policy that allows a claim to be denied. Exclusions and no coverage are two other common policy defenses. As an accountant, I do not focus on that. Even when a valid policy defense exists, when litigation may occur, we are called upon to calculate the loss as if no policy defense existed.
When a loss occurs, the first thing to happen is that the insured notifies the insurance company. After that, the insured is supposed to submit a claim detailing out the loss and the calculation behind it. This makes it very easy for our side. With a detailed enough claim, we basically just check your work. We apply different methodology at times, but only when it makes sense.
If it's a fraudulent claim, a lot of the time, a detailed claim never comes - just a number. Usually a number at or above the limit of the policy. When we get this number, usually we will have a phone call with the insured, and then send out a document request letter detailing all the records we want. We will normally get about half of the records, but sometimes we get less than that, sometimes everything we request. If it's a fraudulent claim, we will likely get very little, or more than we asked for.
See, insureds like to think that if they send us enough stuff, we won't be able to look at everything. However, it is their duty to substantiate their claim. If they throw lots of paper at us, we can just come back and ask them, "Which of these things supports your claim?"
If it's a fraudulent claim, and the records are not fraudulent, then we can easily calculate a no loss, because the answers are going to be right there on paper. It's a bit trickier if they submit fraudulent statements. If we think it's fraudulent, we can ask for the backup behind the financials - usually sales tax returns, or even register slips for sales, bank statements, and invoices for any expenses, with cancelled checks.
If they sent you the records, and you calculate no loss, they will probably sue. Wouldn't you? After all, what have they been paying those premiums for?
In another article, I will discuss buying business income insurance so that you aren't paying your premiums for nothing.