Deep Pocket Syndrome

Property insurance is a highly specialized line which requires various kinds of technical expertise in assessing a loss as well as settling a claim. The ‘insured’ in this case are usually commercial buildings, factories, godowns etc. and the goods/assets stored therein. Property insurance is also a high-value sector as it provides cover to heavy engineering projects, machinery, construction etc. which is often spread over a large geographical area. Valuation of the asset at the underwriting and the claims stage involves complicated stock accounting process which makes the nature of this business scientific and impersonal in comparison to other retail lines of insurance. 

The quantum of loss in property insurance is usually very large with the value of claims can be very high worth hundreds of crores in a single location. For any damage exceeding 20,000, IRDA approved surveyors are appointed who serve as independent experts and are able to assess the damage on the basis of their technical knowledge and experience in the field. These surveyors are specialists in various disciplines of engineering, chartered accountancy, cost accountancy, along with an insurance background. Due to its basic nature, sum assured in property insurance is very high. 

Moreover, the bandwidth of exaggerating the value of loss is also very high, which can be one of the possible motivations for making a fraud. For example, if a genuine claim worth 1 crore is overstated as 3-5 crores, so the extra income for the fraudster is a sizeable amount. This is called as “Deep Pocket Syndrome” which leads to a morale hazard. Other possible motivations can be to intentionally destroy and subsequently receive payment for goods that could not have otherwise be sold or does not have a market. is difficult to maintain data on fraudulent claims but a rough estimate confirmed that 10 out of 100 claims are fraudulent in nature. But it is not necessary that all such frauds are successfully realized by the insured. To correctly assess the loss and detect the possibility of a fraud, it is crucial to appoint asurveyor with the appropriate knowledge and skillset in the investigation. This makes it a rather subjective assessment, as a lot is dependant on the observations made by the surveyor. Common types of frauds include:

Exaggerated claims – Property insurance is based on the principle of indemnity i.e. covering the financial loss to the extent of the damage. This means in case of a fire, the insurer will pay only the value of the damage and not necessarily the entire sum insured of the policy. This makes it more prone to the extent of damage being inflated to attempt to claim amount more than value of the loss. For example, in a fire accident, goods worth 1 lakh are damaged. However, the claimant registers a claim for 10 lakh.

Location related – The policy is taken for a shop or factory at a particular location. However, while registering a claim, it is shown that the loss occurred at multiple locations. Undamaged goods are removed from site – To increase the extent of loss, goods maybe shifted out from the site so as to include them in the ‘damage’. This can also be justified/defended by manipulating account books wherein the procurement of the good is recorded.

Wrong declaration of value of goods – While valuating the losses in the industrial sector, damage to combustible substances can pose a challenge and therefore are susceptible to be played up.While assessing the loss during the survey, claimant may inflate the value of the goods or exaggerate the number/stock of goods damaged, so as to obtain higher amount from the insurer.

While handling a claim suspected to be a fraud, it is important for the surveyor and claims team to think one-step ahead of the fraudsters to understand the type and extent of fraud being dealt with. Detecting frauds in property insurance requires a deep understanding of what the policy covers and what it doesn’t. A keen eye is often enough to suspect a fraudulent activity or a deliberately caused loss.

There are a number of ways that frauds are detected in property claims but the main indication comes on the initial stage of surveyors visits. Some of these indications are:

1. Delay in notification – unexplained delay in notifying the loss or cause of loss like fire.
2. Non-cooperation – resistance from the claimant to share information or cooperate with surveyor
3. Missing of debris – Conspicuous absence of debris in case of a fire or accident. This debris may have been intentionally removed from the site prior to surveyor’s visit.
4. Non availability of document – Various documents need to be produced to help evaluate the loss. These include bank/loan papers, purchase invoices, contracts, book of accounts etc.
5. Huge number of recent purchases – abnormality detected in the account books on the amount of stock purchased before the loss.