Fraud Detection

Detecting fraud is a critical responsibility of insurers in California. Because fraudulent claims increase costs for insurers and ultimately raise premiums for all policyholders, the law requires insurers to have systems, procedures, and resources in place to identify, investigate, and report suspected fraud. (CIC §2698.35)

Key Tools and Resources

1. Insurance Services Office (ISO)

   • ISO is a nationwide information-sharing organization.

   • Insurers use ISO databases to compare claims data across multiple companies.

   • This helps identify patterns of suspicious activity, such as the same claimant filing similar losses with different insurers, or multiple claims connected to the same property or individual.

2. Arson Database

   • Maintained as part of California’s anti-fraud efforts.

   • Tracks information about suspicious fire losses and individuals with prior involvement in arson-related cases.

   • Helps insurers and investigators spot repeat offenders and fraudulent fire claims.

3. Internal Red Flags and Trend Analysis

   • Insurers must develop their own systems to detect unusual claim activity.

   • Examples of red flags include:

     • Claims filed soon after new coverage is purchased.

     • Losses inconsistent with reported facts (e.g., stolen items with no receipts or proof of ownership).

     • Frequent small claims from the same insured that fit a pattern.

   • Trend analysis helps insurers recognize emerging fraud schemes in specific regions or lines of business.

4. Fraud Warning Language

   • California law requires that all claim forms contain a specific anti-fraud warning statement that making false statements or concealing material facts to obtain insurance benefits is a crime.

   • This serves both as a deterrent to claimants and as a legal safeguard for insurers.

Here’s the mandatory fraud warning statement from California Insurance Code §1871.2 that must appear on all insurance claim forms:

“Any person who knowingly presents a false or fraudulent claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison.”

• This warning must be clearly printed on all claim forms used in California.

• Its purpose is to deter fraudulent activity by reminding claimants of the criminal consequences of false claims.

• If an insurer fails to include this statement on their forms, they may face regulatory penalties under California Department of Insurance (CDI) rules.

• Similar fraud warning statements are also required in other states, but California’s wording is specific to its Insurance Code.

While California requires very specific language, every state mandates some form of fraud warning. Producers and insurers operating across multiple states must ensure the correct wording is used for each jurisdiction, or they risk noncompliance.

Below is a comparison table showing California’s required fraud warning language alongside examples from a few other states, so learners can see how these requirements differ.