It is estimated that a third of all claims against local authorities are fraudulent or exaggerated. With deductibles rising, many will be uninsured and their own pot of money is taking a hammering. Richard Adams asks if insurance and legal advisers are helping to hit home the need for better risk management
Fraud is a growing menace for local authorities. The fact that councils are now being forced to take on higher deductibles, has led to more lower-value claims being handled in-house and paid for via self-insurance. Consequently, it means that there is often no insurer to provide the necessary guidance and support.
While statistics on the level of fraudulent claims received by councils vary, it has been argued that local authorities simply lack the resources - with some managers in denial over the fraud issue. However, various initiatives are currently under way to stem the problem of fraud in the public sector. But how effective are they and can insurers help fight fraud on claims they do not pay?
Sheila Boyce, chief executive of Alarm - the national forum for risk management in the public sector - says local authorities can be good at fraud detection and prevention in certain areas, such as housing benefit fraud.
The self-insurance barrier
However, fraudulent claims of the slip and trip and liability variety are causing a problem for many. "One of the big issues facing the public sector in preventing fraud relates to the high levels of self-insurance," confirms Ms Boyce. The insurance market is a difficult place for local authorities with most insurers expecting on average a £100,000 minimum deductible from metropolitan and county councils and up to £250,000 in some cases. As a consequence, claims below these levels are dealt with by council staff, which are not privy to data-sharing schemes such as CUE PI and other initiatives."
Alarm is currently working with members to develop information-sharing strategies to help combat the problem. It is also drawing up guidelines for claims handlers to help detect fraudulent claims, which Alarm says account for a third of all claims made against local authorities.
Last month, Alarm launched its risk management toolkit" providing users with a model risk management strategy, a presentation training course, wall charts and other materials for conducting workshops as well as a CD-Rom containing all this information. It is aimed at public sector managers who are under increasing pressure to improve services, while containing costs.
The nationally available toolkit is compliant with the Risk Management Standard, developed and launched last year in collaboration with the Association of Insurance and Risk Managers and the Institute of Risk Management. It is designed to give organisations the confidence to integrate risk management into day-to-day activity.
Concerning previous estimates by insurers that fraudulent claims against councils are only around 10%, Ms Boyce says: "The survey we conducted was initially of the straw poll-type, but participating councils and others have conducted their own - more detailed - research subsequently, which strongly supports the accuracy of this higher figure."
She says the problem tends to affect urban areas and what are classified as highway claims - commonly foot passengers' slip and trip-type claims.
"Resources allocated for preventative action such as repairs are being strained because they become reallocated - to investigate, for example, whether a particular section of a footpath is dangerous - which can lead to a vicious circle. The ingenuity and contempt of some fraudsters runs to making a claim then damaging an area after knowing full well the council would not have had to time investigate yet. But these and other fraudulent practices, plus the legal costs associated with highway claims, are destroying the fundamental resources of local authorities," she explains.
Ms Boyce says the government is now becoming concerned at the high level of highway claims, as resource used to settle them is cutting into the budget to pay for the government's 10-year targets for roads.
She continues: "We're also involved in a two-tiered awareness-raising campaign through the national and local media. Raising awareness is critical as some local authorities are in denial about the extent to which they are being defrauded."
Glen Marr, fraud liaison manager at Zurich Municipal, says the key problem is the lack of data available from local authorities to quantify the extent of the problem. While he agrees that high deductibles mean councils do not benefit from data-share initiatives run by insurers to combat fraud, he says: "There is a growing appetite among local authority managers for information and advice on fraud prevention. While it is true we don't advise clients on claims under the deductible, advice and best practice given on claims above that filters down to all types of claims handling.
There are also some very simple and generic ways to fight fraud and there is on-going dialogue between Zurich Municipal and councils to help them raise their game with detection and prevention."
Lack of resources
Mr Marr explains that there are barriers to combating fraud: "A common problem is the lack of resources, but tackling the problem can, in many instances, be inexpensive. There needs to be a focal point among claims handlers and management. A change of mindset to take this on costs nothing, but is the backbone of any effective defence against fraud.
"Many claims, which may seem odd or are blatantly iffy, can be challenged by a letter. Purely corresponding with a fraudster will see many fall at the first hurdle. Another initiative borrowed from the Benefits Agency is a Freephone telephone line for whistle-blowers. Often neighbours inform on fraudsters and a Freephone line makes it easy for those who feel indignant about local cheats. Cases where people lift slabs and deliberately damage a causeway are difficult to prevent, but simple investigations with neighbours can be extremely effective. Often people will not give anything away initially, but business cards are left with them and they do phone back to offer information they weren't happy to disclose on the doorstep."
Douglas Gow, liability claims manager in the public sector practice, Marsh, says there has been an undeniable increase in compensation claims for personal injury or property damage against local authorities generally.
The broker's Liability Claims Unit was set up in 1981 and handles claims for many local authority clients throughout the UK. It also has experience in dealing with claims under both Scottish and English legal systems.
He explains: "Initially, the service was introduced to help clients process within-deductible losses more efficiently. As the insurance market has changed, with more non-conventional programmes and higher deductible levels, so the unit's client base and the range of services offered has also increased.
"Techniques such as contract surveillance have been used where there was a suspicion of a high-value fraudulent claim being made. However, the Human Rights Act and the personal intrusion the courts may feel this creates has led some local authorities to shy away from using these techniques to evaluate the legitimacy of claims.
"On the other hand, we do still regularly receive phone calls and letters from neighbours, family members and friends of claimants who will discredit the claim being made. However, they often refuse to identify themselves and their anonymity means their evidence is inadmissible, which can be very frustrating for everyone concerned."
Despite these frustrations, Mr Gow observes that local councils have become much more proactive in their response to and prevention of claims to protect their deductibles and to avoid hitting their stop-loss limits.
"Risk management is becoming more widely practised with in-house risk managers appointed who have insurance or legal backgrounds," he adds.
As part of the initiatives to raise awareness, Marsh is involved in roadshows, where it visits clients and talks to incumbents such as road inspectors and housing officers to help to train them to ask the right questions and create accurate records of incidents. "This also helps the claims handler gain a greater appreciation of the difficulties faced by the inspectors. Claims may arise several years after the incident and making sure records are in place can ease the process further down the line."
Local authorities are also improving computer tracking of incidents using enhanced risk management databases. Using these systems helps identify multiple claimants, identify claim trends and track local black spots in an area more effectively and quickly, according to Mr Gow.
"Some false claims can be relatively simple to identify due to irregularities in statements, location of incidents, time of events and so on. Others, however, are more difficult to spot, but with a co-operative and pro-active approach from all interested parties, from local authorities to claims handlers, insurers to loss adjusters, these claims can be effectively tackled and ultimately reduced," he concludes.
Regarding the involvement of insurers on claims at the self-insured level, Andrew Caplan, local authority specialist and solicitor at law firm Kennedys, agrees they must keep an eye on these claims and step in to advise clients to prevent them reaching the stop-loss level. "Although claims within the excess may not be paid by the insurers, the aggregate effect can mean they may become liable. Early involvement at this level could prevent this from happening."
Kennedys has worked with several local authority clients and their insurers for some years. Mr Caplan notes that in this time, the increases in deductibles and premiums charged have seen local authority managers take a more proactive and hands-on approach to fighting fraud and exaggerated claims.
He continues: "We have been successful in developing and influencing the reporting mechanisms of claims and setting up an investigation procedure to identify potential frauds and also limit the authorities' liability generally.
"The cornerstone of this is fact-gathering - including photographing of the accident locus and arranging a site survey with the claimant to ensure any potential ambiguity is ironed out at an early stage. Record-keeping is also essential in the fight to limit liability. Inspection and repair records and the development of generic statements clearly setting out the highways policy will go a long way to setting out a comprehensive defence to ensure all possible avenues are pursued in mounting an effective defence of claims. A careful review of employment and medical records also often proves to be a fertile hunting ground."
However he urges caution when distinguishing a claim as either fraudulent or exaggerated. "A fraudulent claim will need to be carefully drafted with specific allegations, which, if unproven, could lead to serious costs penalties," he warns, adding: "Where an exaggerated claim is suspected, obtaining medical evidence, medical and other records and putting together the necessary team of experts will form the foundation of the defence.
The more evidence the defence team can reveal early on, the greater the pressure on the claimant to consider an early low settlement offer - especially where the claim is funded by after-the-event insurers.
"Historically, the pressure has always been exerted by the claimant, but with the advent of the Woolf reforms and the increase in premiums, there is a real need for the defence team to be proactive and put the claimant on the back foot."
Mr Caplan emphasises the need for early development of a working relationship between the authority, insurer and legal team to ensure thorough investigations are completed from the start. "This makes certain that when the claim is presented, the defence team hits the ground running and is able to respond to a claim that has usually been front-loaded by the claimant team."
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