10.5 Fraud Detection, Louisiana Fraud Reporting, Subrogation & Salvage

Core Principle: Claims adjusters stand as the frontline defense against fraudulent claims, charged with identifying suspicious claim indicators, maintaining objective neutrality, collaborating with Special Investigation Units (SIU), and enforcing statutory recovery through subrogation and salvage under Louisiana law.

Classifications of Insurance Fraud

Insurance fraud is universally divided into two primary legal classifications:

1. Hard Fraud (Deliberate / Premeditated)

Hard fraud occurs when a person intentionally fabricates or stages a loss that never occurred, or deliberately causes destruction to collect insurance proceeds:

• Arson for Profit: Deliberately setting fire to a home, commercial building, or vehicle to collect policy limits.
• Staged Collisions: Premeditated vehicular crashes ("swoop-and-squat") orchestrated by organized crime rings involving recruited drivers and corrupt medical providers.
• Fabricated Theft / Burglary: Filing police reports and insurance claims for non-existent jewelry, art, or electronic equipment, or reporting a vehicle stolen when it was intentionally dumped in a bayou or dismantled at a chop shop.
• Paper Accidents: Submitting claims for collisions that never occurred using fabricated repair bills and fraudulent police reports.

2. Soft Fraud (Opportunistic / Exaggeration)

Soft fraud (often termed "opportunistic fraud") occurs when an insured experiences a genuine, legitimate loss, but opportunistically exaggerates the value, inflates damages, or misrepresents pre-existing conditions:

• Padding Claims: Adding pre-existing dents, rust, or mechanical defects to an otherwise legitimate auto hail or collision claim.
• Inflating Personal Property: Claiming high-end designer apparel or electronics when cheap generic items were destroyed in a kitchen fire.
• Contractor Invoicing Manipulation: Inflating labor hours, square footage, or material grades on reconstruction estimates to absorb the policyholder's deductible.
• Misrepresenting Vehicle Use: Falsely stating a commercial delivery vehicle was strictly used for personal pleasure commuting to obtain lower personal auto rates.

+-------------------------------------------------------------------------+
|                        HARD FRAUD vs. SOFT FRAUD                        |
+-------------------------------------------------------------------------+
| HARD FRAUD: Complete fabrication or deliberate destruction from day one |
|             (e.g., Arson, Staged Auto Accidents, Fake Burglaries)       |
|                                                                         |
| SOFT FRAUD: Legitimate fortuitous event occurred, but damages or claims |
|             are opportunistically inflated, padded, or exaggerated      |
+-------------------------------------------------------------------------+

Red Flags in Property, Casualty & Auto Claims

A red flag is a factual indicator or anomaly that signals potential fraud. A single red flag does not prove fraud, but a cluster of red flags mandates heightened scrutiny and formal referral to the Special Investigation Unit (SIU).

Special Investigation Units (SIU) & Adjuster Responsibilities

The Special Investigation Unit (SIU) is a specialized investigative division within an insurance company dedicated to detecting, deterring, and investigating suspicious and fraudulent claims.

The Critical Role and Boundaries of the Field Adjuster

Adjusters must maintain professional objectivity and operate strictly within authorized legal boundaries:

• Identify & Document: The adjuster's duty is to recognize fraud indicators, gather and preserve physical evidence, take detailed recorded statements, and document objective facts in the claim file.
• DO NOT Accuse: The adjuster must never accuse the insured of fraud, fraud conspiracy, or criminal conduct. Making unfounded verbal accusations exposes the adjuster and insurer to civil liability for defamation, slander, and intentional infliction of emotional distress.
• DO NOT Threaten Prosecution: The adjuster must never threaten criminal prosecution to coerce a policyholder into dropping a claim or accepting a reduced settlement.
• Refer to SIU: When red flags indicate substantial suspicion, the adjuster completes a formal SIU Referral Form detailing the specific indicators. The SIU takes over lead investigative authority, utilizing specialized forensic tools.

SIU Investigative Tools

• Forensic Accountants: Audit personal and business financial records to establish financial motive (debt-to-income ratios, bank balances, accounts payable).
• Origin & Cause (O&C) Fire Investigators: Certified forensic fire engineers who analyze burn patterns, electrical arcs, and deploy hydrocarbon sniffers and K-9 accelerant-detection dogs.
• ISO ClaimSearch / NICB Database: Centralized industry databases that track prior loss histories across all insurance companies nationwide, exposing multi-carrier claims.
• Forensic Engineers & Crash Data Retrieval (CDR): Download Event Data Recorders ("black boxes") from vehicles to extract pre-crash speed, braking, and seatbelt usage.

Louisiana Insurance Fraud Law (RS 22:1921 et seq.)

What Counts as a Fraudulent Insurance Act (RS 22:1923)

A "fraudulent insurance act" includes acts or omissions committed knowingly and with intent to defraud, such as:

• presenting, or preparing for presentation, an oral or written statement the person knows contains materially false information, or concealing material information, about an application, rating, claim for payment, premium or policy payment;
• violating listed public adjuster statutes, including R.S. 22:1693(B) and 22:1703–1706 (R.S. 22:1923(2)(o));
• presenting to an insurer or insured a statement, estimate, invoice, bid, proposal, proof of loss or other document that misrepresents the scope of damages or the cost of repairs on a property insurance claim (R.S. 22:1923(2)(p)); and
• effective July 1, 2026, amending or altering an adjuster's or appraiser's original repair estimate, a revision, or a supplemental estimate without documentation in the claim file or other notice to the estimate's issuer (R.S. 22:1923(2)(q), Acts 2025, No. 406).

"Statement" is defined broadly and includes estimates of property damage, invoices, bills for services and proofs of loss.

Criminal Penalties (RS 22:1924)

• Committing a fraudulent insurance act, or knowingly presenting or helping prepare a false, incomplete or fraudulent statement material to a claim, with intent to injure, defraud or deceive, is a felony: imprisonment, with or without hard labor, of up to five years, a fine of up to $5,000, or both, on each count.
• If the benefit involved is $1,000 or less, imprisonment is limited to six months and the fine to $1,000 per count.
• The court also orders restitution of payments that were not owed plus the victim company's investigation costs, attorney fees and court costs.

Mandatory Reporting (RS 22:1926)

• Any person or entity, including insurers, producers and adjusters, that suspects a fraudulent insurance act will be, is being, or has been committed must, within 60 days of receiving notice of it, send the required information to the office of insurance fraud on the commissioner's form.
• The office reviews the reports, investigates selected acts, and refers alleged violations to the appropriate licensing agency, the state police insurance fraud unit, the Department of Justice insurance fraud support unit and the prosecuting authority.

Civil Immunity (RS 22:1928)

• An insurer, its employees or agents, or anyone else acting without malice, fraudulent intent or bad faith is immune from civil liability for libel, slander or other torts for fraud reports and information required by the fraud statutes, or provided to law enforcement, the NAIC, the Department of Insurance, fraud-prevention organizations and others involved in detecting fraud.
• A protected person who prevails in a civil suit is entitled to attorney fees and costs if the suit was not substantially justified.

Subrogation Legal Mechanics & Principles

Subrogation is the equitable and contractual doctrine whereby an insurance company, having indemnified its policyholder for a covered loss, "steps into the legal shoes" of the policyholder to recover those payment amounts from the negligent third party (tortfeasor) who actually caused the damage.

Purpose of Subrogation

1. Prevents Unjust Enrichment: Prevents the insured from collecting a "double recovery" (collecting from their own carrier and then suing the tortfeasor for the same damages).
2. Places Financial Burden on the Wrongdoer: Ensures the at-fault party bears financial responsibility for their negligence.
3. Reduces Insurance Premiums: Subrogation recoveries are credited against insurer loss expenses, lowering overall loss ratios and stabilizing policyholder premiums.

The Subrogation Process

1. Identify Liability: The adjuster establishes third-party fault during initial investigation (e.g., a negligent driver running a red light, or an HVAC technician puncturing a refrigerant line).
2. Notice of Subrogation Lien: The adjuster immediately issues a formal written Notice of Subrogation Lien to the tortfeasor and their liability insurer, placing them on notice of the carrier's equitable subrogation rights.
3. Joint Scene & Evidence Inspection: The adjuster invites the adverse party and their forensic engineers to inspect the physical evidence before alterations occur.

Partial Payment and Subrogation (Civil Code art. 1826): When subrogation arises by operation of law, the subrogated insurer may recover from the responsible party only to the extent of what it paid. Under art. 1826(B), an original obligee who has been paid only in part may exercise its rights for the balance of the debt in preference to the new obligee. For an insured who has not been fully compensated, for example because of a deductible or uninsured damage, this gives the insured priority for that balance over the subrogated insurer, unless a valid contract provision changes the result.

The Doctrine of Spoliation of Evidence

Spoliation of evidence is the intentional, reckless, or negligent destruction, alteration, or failure to preserve physical evidence relevant to ongoing or reasonably foreseeable civil litigation.

Adjuster's Legal Duty to Preserve Evidence

When an adjuster recognizes potential third-party subrogation or civil litigation, a strict legal duty arises to preserve all relevant physical instrumentalities (e.g., defective water heaters, failed electrical switches, vehicle brake lines):

• Judicial Sanctions for Spoliation: If an adjuster discards or alters evidence before the adverse party has an opportunity to inspect it, Louisiana courts may impose devastating evidentiary sanctions:
  1. Adverse Presumption: The court instructs the jury to legally presume that the destroyed evidence would have been unfavorable to the party who destroyed it.
  2. Exclusion of Expert Testimony: The court strikes the testimony of the insurer's forensic engineers.
  3. Dismissal of Subrogation Action: Complete dismissal of the carrier's recovery lawsuit.

Salvage Disposition Mechanics

Salvage is the damaged property that an insurer takes possession of after paying a total loss settlement to an insured.

Mechanics of Salvage

1. Total Loss Settlement: When damage makes the property a total loss, the insurer pays the policy's total loss value. For Louisiana vehicle titles, a total loss is damage equal to 75 percent or more of market value (R.S. 32:702), and when a settlement declares a vehicle a total loss, the endorsed title and a salvage title application must be sent to the Office of Motor Vehicles within 30 days (R.S. 32:707(I)).
2. Transfer of Ownership: In exchange for the full total loss payment, the insured surrenders title and legal ownership of the damaged property to the insurer.
3. Salvage Auction & Liquidation: The insurer contracts with commercial salvage auction vendors (such as Copart or Insurance Auto Auctions - IAA) to auction the salvage to licensed rebuilders, recyclers, or scrap dealers.
4. Net Loss Mitigation: Net proceeds generated from the salvage auction are credited against the insurer's gross claim payout, reducing the total net loss on the claim file.
5. Insured Retention of Salvage: If the policyholder insists on keeping the damaged property (e.g., an older wrecked vehicle with sentimental value), the agreed salvage value is deducted from the total loss settlement payment.

Practical Application & Exam Scenarios

Scenario 1: The Kitchen Fire with Arson Indicators

An adjuster inspects a residential kitchen fire in Monroe. The homeowner claims a grease pan caught fire while cooking. However, the adjuster observes two distinct V-burn patterns on opposite living room walls, a strong odor of diesel fuel, unburned carpet puddles, and notes that all three family dogs and valuable family photo albums were placed in a storage shed behind the house the afternoon of the fire. The homeowner demands an immediate $50,000 cash advance.

• Analysis: The adjuster is confronted with classic arson and hard fraud red flags (multiple points of origin, pour patterns, accelerant odor, and prior removal of pets/heirlooms). The adjuster must not accuse the homeowner of arson. Instead, the adjuster must objectively document the scene, take three-tier photos, avoid paying an advance, and immediately file an emergency SIU Referral. The SIU will deploy a certified Origin and Cause fire investigator and demand an Examination Under Oath (EUO).

Scenario 2: Contractor Invoice Padding (Soft Fraud)

A homeowner suffers wind damage to shingles during a severe storm. A roofing contractor submits an estimate for $22,000, which includes replacing 45 squares of shingles. The adjuster inspects the roof and measures only 28 squares of roof surface. The contractor admits off-the-record that he inflated the measurement so the homeowner "wouldn't have to pay their $2,500 hurricane deductible."

• Analysis: This is soft fraud (opportunistic claim padding). Knowingly presenting an estimate that misrepresents the scope of damages or the cost of repairs is a fraudulent insurance act under RS 22:1923(2)(p). The adjuster adjusts the claim to the actual 28 squares, documents the contractor's statement and refers the file to SIU, and the suspected fraud is reported to the office of insurance fraud within 60 days of receiving notice (RS 22:1926).

Scenario 3: Spoliation Defeating a Subrogation Claim

A commercial building suffers $200,000 in fire damage. The local fire department traces the fire to an electrical space heater in an office. The independent adjuster inspects the scene, takes three photos of the melted space heater, and instructs the cleanup crew to throw the space heater and melted wiring into a dumpster. After paying the claim, the insurer sues the space heater manufacturer.

• Analysis: The space heater manufacturer will file a motion for summary judgment based on spoliation of evidence. Because the adjuster discarded the physical heater, depriving the manufacturer's engineers of the right to test for internal manufacturing defects vs. external electrical surges, Louisiana courts will apply an adverse presumption or dismiss the subrogation action entirely.