64 Def. Counsel J. 23 (1997)
Fraud and Its Effects on the Insurance Industry

handle is hein.journals/defcon64 and id is 25 raw text is: Fraud and Its Effects
on the Insurance Industry
A marshaling of anti-fraudforces and an awakening of the public
are needed to combat increasing and more sophisticated insurance fraud

By Edward L. Schrenk and Jonathon B.
Palmquist
IN 1993, New Jersey's insurance fraud di-
vision staged a series of bus accidents in
which the only passengers were state fraud
investigators. The sting operation impli-
cated more than 100 persons who claimed
injuries after either jumping on the buses
immediately after the accident or filing a
claim after driving by the scene.
Although alarming, this is not an isolated
incident of insurance fraud; it repeats itself
every day in various forms in cities, large
and small, across the nation. In fact, fraud
has been a plague on the institution of in-
surance from the time people first began
pooling their resources to minimize the risk
of individual financial losses. Now in a so-
ciety vastly more mobile and technologi-
cally sophisticated, fraud simply has taken
new shapes and is of greater magnitude.
The problems associated with insurance
fraud are beginning to receive national at-
tention. They are addressed in the national
press, on television and radio, special re-
ports, and in insurance company advertise-
ments. Some companies have set up
hotlines to receive reports of fraud. Many
states and the federal government have
taken notice, offering various proposals to
deal with fraud.
Nevertheless, criminal prosecution of in-
surance fraud is a low priority with law
enforcement and prosecutors. As one pros-
ecutor put it, insurance fraud is simply one
thief stealing from another. Facing contin-
ued indifference and lack of resources by
prosecutors, insurance companies have
been forced to go on the offensive, using
civil remedies to prosecute fraud cases

IADC member Edward L. Schrenk is Se-
nior Vice President and General Counsel
of USAA Property and Casualty Insurance
operations in San Antonio, Texas. A
graduate of the University of Notre Dame
and DePaul University Law School in
Chicago, he engaged in insurance defense
practice and served in various claims and
claims counsel capacities prior to joining
USAA. He is a past chairman of the Board
of Governors of the National Insurance
Crime Bureau.
Jonathon B. Palm quist is Legislative
Counsel for USAA Property and Casualty
Insurance operations. He received a B.A.
degree from Baldwin Wallace College, at-
tended law school at Ohio State University
and the University of Louisville, and re-
ceived an M.A. in international manage-
ment from Baylor University.
against medical providers, lawyers, con-
tractors, automobile repair shops, and oth-
ers. Comparative and reverse bad faith are
theories of law that are slowly evolving to
equip insurance companies with remedies
against spurious bad faith claims. The fed-
eral Racketeer Influenced and Corrupt Or-
ganizations Act, known as RICO, has
emerged as a strong civil weapon for insur-
ance companies. And traditional common
law and fraud statutes continue to be used.
THE COST OF FRAUD
It is impossible to state precisely the fi-
nancial impact of insurance fraud. There
are some estimates that fraud ranks second
only to illegal drug trafficking in terms of
illegal dollars earned.
In 1985, property and casualty insurance

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