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California Imposes New Emergency SIU Regulations

In its continuing effort to closely regulation insurers the California Department of Insurance gave notice on August 15, 2003 of its intent to impose Emergency Special Investigative Units Regulations, Title 10, Chapter 5, Subchapter 9, Section 2698.40 of the California Code of Regulations. The full text of the proposed Regulations are available from the Department at its web site at http://www.insurance.ca.gov/docs/FS-Insurer.htm.

The reason for the proposed Emergency Regulations are stated as:

Insurance fraud in the State of California is extensive; it is estimated that the cost of insurance fraud committed annually in the area of worker's compensation insurance is between $1-3 billion dollars. Automobile insurance fraud costs each consumer an additional two hundred dollars per policy of automobile insurance every year. These costs of insurance fraud are borne both directly by the individual policyholder and indirectly by the consumer as the costs of goods and services increase to accommodate the higher premiums paid by businesses. Currently, California law addresses the issue of deterrence and detection of such insurance fraud through a statutory scheme. California Insurance Code Section 1872.50 requires that every insurer admitted to do business in the state shall maintain a unit or division to investigate possible fraudulent claims; these units are referred to as Special Investigative Units or alternatively, SIU's.

Some of the changes proposed will be expensive to implement and -- unless insurers are willing to be assessed severe fines or lose their certificates of authority -- must be complied with religiously. They include:

Staffing

First, SIU's must be adequately staffed. The adequacy of an insurer's SIU staffing will be determined by the Regulations by the SIU's "demonstrated ability to establish, operate and maintain an SIU that is in compliance with these regulations." To do so, the SIU must be composed of "employees who have knowledge and experience in general claims practices, the analysis of claims for patterns of fraud, and current trends in insurance fraud, education and training in specific red flags, red flag events, and other criteria indicating possible fraud. They shall have the ability to conduct effective investigations of suspected insurance fraud and be familiar with insurance and related law and the use of available insurer related database resources." This means that an SIU may not be staffed by one claims person or claims manager unless that person has the required skills and training. [Section 2698.42]

SIU Contracted Responsibilities

Insurers can contract with an independent entity to act as its SIU. Regardless, the insurer is still responsible for compliance with the Regulations and the Insurance Frauds Prevention Act. The contract must provide:

(1) Specify all SIU duties and functions to be performed by the parties to the contract and how the insurer monitors performance of the contract responsibilities.

(2) Not include provisions that could provide disincentives to the referral and/or investigation of suspected insurance fraud.

(3) Not include provisions that purport to relieve an insurer of any obligation to comply with the requirements of these regulations and the IFPA.

(4) Expressly include a provision to require the contracted entity to comply with all applicable provisions of the IFPA and these regulations. [Section 2698.43]

Contracts with independent SIU's must be renegotiated to ascertain that they comply with the regulation.

Communication With Fraud Division

Section 2698.44 sets out the requirements for communicating with the Fraud Division or other governmental agencies. The Regulations require immediate response to requests from the Fraud Division, including a complete copy of everything in a claim file. All that is required is a single written request which carries with it the compulsion of state law. The requirement to produce documents and cooperate falls on all insurers, and all persons, agents and brokers employed by and conducting business on behalf of the insurer.

Detecting Suspected Insurance Fraud

Section 2698.45 of the Proposed Regulations requires:

(a) An insurer's integral anti-fraud personnel are responsible for identifying suspected insurance fraud during the handling of insurance transactions and referring it to the SIU as part of their regular duties.

(b) The SIU shall establish, maintain, distribute and monitor written procedures to be used by the integral anti-fraud personnel to detect, identify, document and refer suspected insurance fraud to the SIU. The written procedures will include a listing of the red flags to be used to detect suspected insurance fraud for the insurer.

(c) The procedures for detecting suspected insurance fraud shall provide for comparison of any insurance transaction against:

          (1) Patterns or trends of possible fraud

          (2) Red flags

          (3) Events or circumstances present on a claim

          (4) Behavior or history of person(s) submitting a claim or application

          (5) Other criteria that may indicate possible fraud

If the SIU does not have written procedures for all of its claims personnel they must be created and distributed. These must include all of the requirements of the Regulations. They may or may not help the fight against fraud but they create a requirement that will allow auditors from the Department of Insurance to easily determine compliance with the Regulations.

Investigating Suspected Insurance Fraud

Adding to the bureaucracy, rather than investigation, Section 2698.46 requires the SIU to:

(a) The SIU shall establish, maintain, distribute and adhere to written procedures for the investigation of possible suspected insurance fraud. An investigation of possible suspected insurance fraud will include:

          (1) A thorough analysis of a claim file, application, or insurance transaction.

          (2) Identification and interviews of potential witnesses who may provide information on the accuracy of the claim or application.

          (3) Utilizing industry-recognized databases.

          (4) Preservation of documents and other evidence.

          (5) Writing a concise and complete summary of the investigation, including the investigator's conclusions regarding the suspected insurance fraud and the basis for their conclusions.

 If your SIU does not have written procedures it should adopt the Regulations as its written procedures.

Section 2698.48 requires a detailed referral to the Fraud Division which may be difficult to complete but will allow the Fraud Division to maintain data that might be useful in the fight against insurance fraud.

SIU Training

Adding to the bureaucratic complexity of the war against insurance fraud the proposed Regulations, at Section 2698.49 requires the following training, not only for the SIU staff but for all employees involved in claims handling. The Regulations will require:

(a) The SIU shall establish and maintain an ongoing anti-fraud training program, planned and conducted to develop and improve the anti-fraud awareness skills of the integral anti-fraud personnel.

(b) The insurer shall designate an SIU staff person to be responsible for the ongoing anti-fraud training program.

(c) The anti-fraud training program shall include instruction on:

          (1) The function and purpose of the SIU.

          (2) Introduction/review of the written procedures established by the SIU regarding the identification, documentation and referral of incidents of suspected fraud to the SIU.

          (3) Identification and recognition of red flags or red flag events.

          (4) Any changes to current procedures for identifying, documenting and referring incidents of suspected insurance fraud to the SIU.

          (5) Fraud Division insurance fraud reporting requirements.

          (6) Introduction and review of existing and new, emerging insurance fraud trends.

(d) In addition to training provided to integral antifraud personnel provided herein, the SIU personnel shall receive anti-fraud training that include investigative techniques, communication with the Fraud Division and authorized governmental agencies, fraud indicators, emerging fraud trends, legal and related issues. This training shall be provided to SIU personnel by qualified and experienced entities in the subject matter being presented.

(e) All insurers shall provide an anti-fraud orientation program to all SIU and integral anti-fraud personnel within thirty (30) days after hire. Thereafter, insurers shall provide anti-fraud training to SIU and integral antifraud personnel on an annual basis.

(f) Records of the anti-fraud training provided to all staff shall be prepared at the time training is provided and be maintained and available for inspection by the Department on request. The training records shall include the title and date of the anti-fraud training course, name and title and contact information of the instructor(s), description of the course content, length of the training course, and the name and job title(s) of participating personnel.

SIU Annual Report -- Section 2698.50

Sets forth a detailed list of requirements the Department of Insurance expects annually with the insurer, under oath, attesting to compliance with the Regulations including providing statistics to establish compliance. If the SIU is not filing Suspected Fraudulent Claims Reports equal to, at least, three per cent of the claims filed, it will probably be audited by the Department of Insurance to establish compliance with the Regulations.

Penalties

After notice and hearing the Commissioner has the right to impose sanctions for violation of the Regulations of not more than $55,000 and/or suspension or revocation of the insurer's Certificate of Authority. It does not, of course, impose a punishment on the state Fraud Division or the local District Attorneys if they fail to file criminal charges against those suspected of insurance fraud.

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