Corporate Governance

INSIGHT: Fraudulent Transportation Insurance Claims Could Hit $200M

June 5, 2020, 8:01 AM

While the insurance industry grapples with the coming influx of Covid-19 litigation, transportation insurers would be wise to use their 2008 playbook for insight into how claims trends will unfold.

The last economic downturn saw an onslaught of fraudulent transportation claims—and this is likely to resurface in 2020 with 33 million Americans filing for unemployment over the past two months.

Cargo loss claims are particularly susceptible to declining economic conditions. Freightwatch, a transportation logistics security company, found in its five-year review of U.S cargo theft that incidents increased 190% from 2006 to 2010. Comparatively, in 2010 there were 899 incidents of cargo theft (according to Freightwatch) while in 2018 when times were much sunnier, there were only 592 such thefts (according to Security Magazine) which represents a 65% decrease.

The unemployment rate serves as a key indicator for cargo claims. In 2006, before the Great Recession, the unemployment rate in the U.S. was 4.4% but was as high as 10% in 2009. When we compare those in that time period to today, specifically December 2019 to April, we identify the potential for a significant problem. The unemployment rate jumped from 3.5% in to 14.7% in April.

Extrapolating these numbers foreshadows the transportation industry is likely facing a spike in cargo loss claims in excess of 250% over the coming years, or more than a $210 million loss.

Examining the types of claims that were common in 2008 offers some key learnings to those looking to reduce fraud in the coming years.

Double Brokering

One form of fraud involves a scam company presenting as a valid motor carrier in search of a load to haul. When a load is inevitably assigned, the scam company will broker the load to another carrier, called “double brokering,” keep the fee from the haul and leave the carrier that delivered it without payment.

Another form of double brokering occurs when a shipper sends a load to a broker to assign to another carrier. Instead of assigning the load to a carrier, the broker sends the load to another broker, and that broker then assigns a carrier to haul the load.

This type of fraudulent double brokering has prompted the industry to seek federal legislative solutions. The first such initiative had its origins, not surprisingly, in 2010 when the Senate explored the “Motor Carrier Protection Act of 2010.” That legislation would have required the registration of brokerage entities and a $100,000 surety bond to secure payments to carriers. The Act did not leave committee, but eventually the idea was signed into law in 2013 as the Moving Ahead for Progress in the 21st Century Act (MAP-21) which is similar, except for the amount of the bond ($75,000).

Fictitious Pickup

Another fraudulent scheme, known as “fictitious pickup,” was prevalent in 2009 and 2010, and is primed for a resurgence. Under this scheme, a fraudster reactivates an old carrier number for purposes of seeking out loads to haul and, when one is assigned, takes the goods for himself and never delivers them to the buyer. The common targets for this type of scheme are the food and beverages or the technology industries.

Key Learnings

Many other types of fraud will likely increase during the difficult economic times created by Covid-19, including tried and true methods like false claims of vehicle and cargo theft.

By understanding the types of claims that spike during high unemployment, insurers can better assess each claim’s legitimacy by:

  • Thoroughly investigating claims and utilizing tools such as examinations under oath;
  • Recognizing the types of fraud that occur and stay apprised of industry and government advisories regarding the type and location of fraudulent activity; and
  • Relying upon outside vendors and experts to formulate a litigation strategy before suit is filed to ensure proper posturing and handling of the claim.

Regardless of the scheme, it is not a stretch to say that a poor economic climate has opened the door for more transportation fraud to occur in 2020 and beyond in the aftermath of the post-Covid-19 economy.

These are desperate times for many that have suffered a disproportionate impact, but the transportation industry as a whole must be ready to implement desperate measures to ensure there is not a repeat of the significant fraud that occurred in 2009 and 2010.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Eric Conn is a shareholder in Segal McCambridge’s Detroit office and chair of the Transportation Practice Group. He successfully defends clients through early resolution, facilitation, mediation, summary judgment, trial and appeal.

Thomas N. Lurie is an associate attorney in Segal McCambridge’s Detroit office focusing his practice on transportation litigation.

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