1. society
2. crime
3. property crime
4. fraud

California
Department of Insurance
California
Special Investigative Unit
Requirements
Dave Jones
Insurance Commissioner
Martin Gonzalez
Deputy Commissioner (Acting), Enforcement Branch
Stephen J. Smith, CFE
Enforcement Branch Headquarters Chief
Terri McClain
Audit Manager, SIU Compliance Program
April 2015
Training
This video partially satisfies the new hire orientation, integral anti-fraud
annual, and SIU continuing training requirements.
Specifically, this video satisfies:
 CCR § 2698.39(c)(1)(C) New Hire Orientation
“a review of Fraud Division insurance fraud reporting requirements”
 CCR § 2698.39(c)(2)(E) Integral Anti-Fraud Annual Training
“Fraud Division insurance fraud reporting requirements”
 CCR § 2698.39(c)(3)(B) SIU Continuing Training
“communication with the Fraud Division and authorized governmental agencies”
1
CDI Audits and
Examinations of Insurers
CDI
Market
Conduct
Division
Enforcement
Branch –
Fraud Division
SIU
Compliance
Program
Field Claims
Bureau
2
Financial
Examination
Division
Field Rating &
Underwriting
Bureau
CDI Fraud Division
Mission
“The CDI Fraud Division will protect the
public and prevent economic loss through the
detection, investigation, and arrest of
insurance fraud offenders.”
3
SIU Compliance Program:
Who We Are
 Part of CDI Fraud Division.
 We audit insurer’s SIU operations for compliance with
California SIU statutes and regulations.
4
SIU Compliance Program:
What We Do
 Conduct onsite audits of insurer’s SIU operations
 Analyze SIU Annual Reports filed by ~1,200 insurers
 Train insurers on California SIU statutes and regulations
 Promote identification, investigation, and reporting of
suspected insurance fraud
 Increase insurance fraud awareness
5
SIU Compliance Program Contacts
Terri McClain - Audit Manager
(916) 854-5758
[email protected]
Chez Colson, Auditor
(916) 854-5722
[email protected]
Maryam Tahriri, Auditor
(916) 854-5794
[email protected]
Debra Millan, Auditor
(916) 854-5749
[email protected]
Vacant - Auditor
(916) 854-5786
Darlene Cotham, Analyst
(Annual Report questions only)
(916) 854-5776
[email protected]
6
CDI’s Regulatory Authority
to Examine Insurer SIU
Compliance
California Insurance Code (CIC) §730
California Insurance Code (CIC) §735.5 – Confidential Audits
California Code of Regulations (CCR) §2698.41(a)
“The commissioner may conduct examinations of an insurer’s
SIU and related operations, including operations undertaken
by entities under contract with the insurer, as deemed
necessary to determine compliance with the requirements
of this article.”
7
Requirement to Maintain a SIU
CIC § 1875.20:
“Every insurer admitted to do business in this state, except for
those otherwise exempted in this code, shall provide for the
continuous operation of a unit or division to investigate possible
fraudulent claims by insureds or by persons making claims for
services or repairs against policies held by insureds.”
8
Exceptions to Requirement
to Maintain a SIU
CCR § 2698.30(j)
"Insurer" means every insurer admitted to do business in California except:
1. Reinsurers
2. Title insurers
3. Fraternal fire insurers
4. Fraternal benefit societies
5. Firemen, policemen or peace officer benefit and
relief associations
6. Grant and annuity societies
7. Home protection
9
What is required of the Insurer’s SIU?
CCR § 2698.30-2698.43
 SIU is knowledgeable and adequately staffed.
 SIU and integral anti-fraud personnel written procedures are
maintained and include all required topics.
 Insurance transactions with red flags are referred to SIU.
 SIU investigations comply with California SIU statutes and regulations.
 Referrals to CDI are accurate, timely and complete.
 Required anti-fraud training occurs and is properly documented.
 SIU Annual Report is accurate and submitted timely.
 Written information requests from CDI and/or district attorneys are
responded to timely and completely.
10
Non-Compliance Penalties
CIC § 1875.24(b) and CCR § 2698.42

Up to $5,000 per inadvertent act
“Inadvertent act of non-compliance” means unintentional.
 Up to $10,000 per willful act
“Willful act of non-compliance” means a purpose or
willingness to commit the act or make the omission.
11
SIU Staffing
CIC § 1875.20-1875.23
CCR § 2698.30(o), 2698.32(a), 2698.33
 Insurers shall maintain a unit or division to investigate possible fraud.
 SIU may be insurer employees or contracted entities.
 May be a distinct unit or division, or SIU duties can be assigned
to employees whose principal responsibilities are the investigation
and disposition of claims.
 Adequacy of an insurer’s SIU staffing shall be determined by
its demonstrated ability to comply with California SIU statutes
and regulations.
12
SIU Knowledge and Ability
CCR § 2698.32(b)
 SIU employees shall have knowledge and/or experience in:
 general claims practices
 analysis of claims for patterns of fraud
 current trends in insurance fraud
 education and training in specific red flag
 red flag events
 and other criteria indicating possible fraud
 SIU employees shall have the ability to conduct effective investigations of suspected
insurance fraud and be familiar with insurance and related law and the use of available
insurer related database resources.
13
Role of Integral Anti-Fraud
Personnel
CCR § 2698.35(a)
“An insurer’s integral anti-fraud personnel are responsible
for identifying suspected insurance fraud during the handling
of insurance transactions and referring it to the SIU as part of
their regular duties.”
14
Integral Anti-Fraud Personnel
Defined
CCR 2698.30(k)
 Includes insurer personnel whose duties may include the processing,
investigating, or litigation pertaining to payment or denial of a claim
or application for adjudication or claim or application for insurance.






claims handlers
underwriters
policy handlers
call center staff within the claims or policy function
legal staff
other insurer employee classifications that perform similar duties
15
Written Procedures for Integral
Anti-Fraud Personnel
CCR § 2698.35(b)
“The SIU shall establish, maintain, distribute
and monitor written procedures to be used by
the integral anti-fraud personnel to detect,
identify, document and refer suspected insurance
fraud to the SIU.”
16
Content of Written Procedures for
Integral Anti-Fraud Personnel
CCR § 2698.35(c)
The procedures for detecting suspected insurance fraud shall provide
for a comparison of any insurance transaction against:





Patterns or trends of possible fraud
Red flags
Events or circumstances present on a claim
Behavior or history of person(s) submitting a claim or application
Other criteria that may indicate possible fraud
17
Investigating
Suspected Insurance Fraud
CCR § 2698.36
The SIU shall establish and follow written procedures for the
investigation of suspected insurance fraud. An investigation of
suspected insurance fraud shall include:
 A thorough analysis of a claim file, application, or insurance
transaction.
 Identification and interviews of potential witnesses.
 Utilizing industry-recognized databases.
 Preservation of documents and other evidence.
 A concise and complete summary of the investigation, including the
investigator’s findings regarding the suspected insurance fraud and
the basis for their findings.
18
Detecting and Investigating
Insurance Fraud
Effective
Ineffective
Establish, maintain, distribute, and monitor
procedures to all anti-fraud personnel
No written integral anti-fraud personnel
and/or SIU procedures
Establish, maintain, distribute and adhere to
SIU investigative procedures
Procedures are outdated
Procedures are not fully compliant with
California SIU regulations
Proactive and aggressive approach to fraud
detection and investigation
Reactive approach to fighting fraud–waits
until losses are incurred
SIU does not investigate
19
Referral of Suspected Fraud to
CDI
CCR § 2698.37
 SIU shall refer suspected insurance fraud to the Fraud Division. Workers’ Comp
shall also be referred to the district attorney.
 Referrals shall be submitted in any insurance transaction where the facts and
circumstances create a reasonable belief that a person or entity may have committed
or is committing insurance fraud.
 Referrals shall be made within 60 days of determining that reasonable belief exists.
 Requirements of this section do not diminish statutory requirements contained in the
Insurance Fraud Preventions Act (IFPA) regarding the confidentiality of any
information provided in connection with an investigation.
Notes:
 Application status, claim status, or possible civil action, suspected fraud is not relevant.
 If you refer to CDI via the NICB website, complete the entire California section at the end of the form.
20
Referral Content
CCR § 2698.38
 Three critical pieces of information are:
1. A complete and concise synopsis
2. Loss amount
3. Loss location(s)
Errors and omissions are significantly reduced by using the electronic
referral system (eFD-1) instead of the paper form (FD-1).
To register for the eFD-1:
call (916) 854-5783 or e-mail [email protected]
21
Reporting Fraud to CDI
Effective
Ineffective
Does not report to CDI at all
Reports to CDI upon reasonable belief of
fraud
Does not report to CDI until the SIU
investigation is completed
Uses current FD-1/eFD-1 forms and codes
Uses outdated paper forms and/or codes
Provides complete and concise synopsis with
sufficient facts and detail
Suspected fraudulent claims contain errors
and/or omissions
Reports within 60 days of reasonable belief
Synopsis does not provide sufficient facts
Maintains contact with CDI Fraud
Investigators
Does not respond to CDI Fraud Investigator
inquires timely
22
Communication
CIC § 1873, 1872.4, 1877.3(d)
CCR § 2698.34
 If an information request is received from CDI or district attorney,
insurer should respond immediately but no later than 30 calendar
days.
Exception: 60 days for Workers’ Comp.
Failure to respond timely and completely may trigger an SIU audit to
identify the cause of the noncompliance and provide recommendations
to resolve the issues. Noncompliance may result in penalties.
Notes:
 Follow up on fraud referrals with the CDI Investigator.
 If a case is declined and you strongly disagree, contact the CDI Investigator to discuss further.
23
Anti-Fraud Training
CCR § 2698.39
The insurer’s SIU shall establish and maintain an ongoing anti-fraud
training program to develop and improve the anti-fraud awareness.
The anti-fraud training program shall consist of three levels:
1. New hire anti-fraud orientation training
2. Integral anti-fraud personnel annual anti-fraud training
3. SIU personnel continuing anti-fraud training
24
Anti-Fraud
New Hire Orientation
CCR § 2698.39(c)(1)
Shall be provided to all new hires* within 90 days of commencing duties and shall
include:
1. Function and purpose of the SIU.
2. Overview of fraud detection and referral of suspected insurance fraud
to the SIU for investigation.
3. Review of CDI Fraud Division insurance fraud reporting requirements.
4. Organization chart depicting the insurer’s SIU.
5. SIU contact telephone numbers.
* Integral Anti-Fraud Personnel new hires.
25
Integral Anti-Fraud Personnel
Annual Training
CCR § 2698.39(c)(2)
Integral anti-fraud personnel shall receive annual anti-fraud training, which shall
include:
1.
Review of the function and purpose of the SIU.
2.
Introduction/review of written procedures for the identification, documentation
and SIU referral of incidents of suspected fraud.
3.
Identification and recognition of red flags or red flag events.
4.
Any changes to current procedures for identifying, documenting
and referring incidents of suspected insurance fraud to the SIU.
5.
CDI Fraud Division insurance fraud reporting requirements.
6.
Introduction/review of existing and new, emerging insurance fraud trends.
26
SIU Personnel
Continuing Anti-Fraud Training
CCR § 2698.39(c)(3)
The SIU personnel shall receive continuing anti-fraud training that
includes:
1. Investigative techniques
2. Communication with the CDI Fraud Division and other
authorized governmental agencies
3. Fraud indicators
4. Emerging fraud trends
5. Legal and related issues
27
Documenting Anti-Fraud
Training
CCR § 2698.39(d)
 The insurer shall maintain records of the anti-fraud training provided to new
hires, integral anti-fraud personnel, and SIU staff.
 The training records shall include:
 Title and date of the anti-fraud training
 Name, title and contact information of the instructor(s)
 Description of the course content
 Length of the training course
 The name and job title(s) of participating personnel
Records shall be prepared at the time training is provided and be maintained
and available for inspection by CDI upon request.
28
Anti-Fraud Training
Effective
Ineffective
Training does not cover all topics required
Anti-fraud orientation provided to all
integral anti-fraud new hires within 90 days
of commencing assigned duties
Anti-fraud orientation not provided to all
integral anti-fraud new hires
Annual anti-fraud training provided to all
integral anti-fraud personnel
Annual anti-fraud training not provided at all
or only to some integral anti-fraud personnel
Continuing anti-fraud training provided to all No system to ensure all integral anti-fraud
SIU staff
personnel receive anti-fraud training
Maintain adequate and complete training
records
SIU does not receive continuing education
Lack of or incomplete training records
29
Anti-Fraud Training (cont.)
Effective
Ineffective
Insurer keeps informed of:
Insurer not aware of new regulations or statutes
 Current regulatory and reporting
requirements
SIU does not keep abreast of fraud trends,
detection, use of databases
 Fraud alerts, red flags
SIU does not train or share information with
integral anti-fraud personnel
 Updated procedures
Insurer does not interact with CDI or other
authorized agencies
 Fraud referrals
 Emerging fraud trends, detection methods
Insurer works with CDI for training purposes as
well as investigations
30
SIU Annual Report
CCR § 2698.40
 Each primary insurer shall file a SIU Annual Report for itself
and its subsidiary(ies).
 CDI notification is mailed in June. SIU Annual Report is due
within 90 days.
 Report must be signed by an officer of the holder of or applicant
for the Certificate of Authority
31
SIU Annual Report
Compliant
Non-Compliant
Submits complete and accurate report timely
Incomplete, inaccurate report
If using a contracted SIU, TPA(s), General
Agent(s), or MGA(s), provides contracts
Fails to provide contracts for external SIU,
TPA(s), General Agent(s) and MGA(s)
Contracts contain all required information
Fails to indicate how contracted SIU is
monitored
Statistics include information from primary
insurer, subsidiary insurer, TPAs, General
Agents, and MGAs
Fails to submit annual report timely
32
SIU Audits
CCR § 2698.41
Two types of audits are used to determine the adequacy of the
insurer’s SIU based on compliance with applicable sections of the
IFPA and CCR § 2698.30-2698.43.
 Onsite Audits - focuses on all aspects of insurer’s SIU operations
 Limited Scope Audits
A. SIU contracts
B. Written procedures
C. Training materials and training records content
D. Other objectives as needed
As appropriate, insurers will be invoiced for travel expenses, per
diem, and billable time.
33
How is an Insurer selected
for an SIU Audit?
 SIU Annual Report review
 Quantity and quality of referrals to CDI
 Lines of insurance
 Market share
 Failure to respond to CDI information request
 Commissioner’s priorities
 Referrals from within/outside CDI
34
SIU Audit Process and Timelines
 A field audit usually takes one week onsite
 CDI contacts insurer 8 weeks in advance to schedule dates and location of
onsite audit.
 The audit process starts with an engagement letter and Documentation
Request to insurer. Some documents are due 30 days prior to onsite visit.
 Provide requested documentation timely, including full system access on the
first day.
 Entrance conference is held the first day.
 Exit conference is typically held the last day.
 Potential findings are discussed at exist conference.
35
SIU Audit Process and Timelines
(cont.)
 Insurer has 30 days to respond to Preliminary Report and submit a
Corrective Action and Compliance Plan (CACP).
 If CACP is accepted by CDI, it becomes a supplement to the SIU
Annual Report on file.
 Final Report is issued ~60 days after insurer’s response to
Preliminary Report is received.
 Final Report states whether the CACP is accepted by CDI.
 Non-compliance with California SIU statutes or regulations will
result in penalties.
36
What the Auditors Look at to
Determine Compliance











SIU staffing and performance
Written anti-fraud procedures for integral anti-fraud personnel
Written procedures for SIU investigations
New-hire anti-fraud orientation training (materials and records)
Annual anti-fraud training for integral anti-fraud personnel (materials and
records)
Continuing anti-fraud training for SIU (materials and records)
Closed California claims
SIU investigation files
eFD-1/FD-1 suspected fraud referrals
SIU Annual Report
CDI and DA documentation requests and the timeliness of insurer response
37
External SIUs, TPAs, General Agents,
MGAs, and Partners are also Examined
CCR § 2698.34(a), 2698.41(a)
“The operations/activities conducted by external entities
such as contracted SIUs, TPAs, General Agents, and
MGAs conducting business on behalf of the insurer are
subject to audit.”
38
External SIUs, TPAs, General Agents,
MGAs, and Partners are also Examined
CCR § 2698.34(a), 2698.41(a)
 External SIUs, TPAs, General Agents, MGAs, Partners, etc.
 If you contract out any part of the SIU or integral anti-fraud
personnel services function, they must comply with California
SIU statutes and regulations
 Insurer is responsible to ensure their contracted entities comply
 Blanket compliance statements such as, “the TPA/MGA must be
responsible for all compliance issues” does not go far enough
39
Responding to Findings and
Recommendations
Acceptable
Recognize non-compliance
Unacceptable
Does not take prompt corrective
action to resolve non-compliance
Be willing to implement
recommendations
Attempts to defend deficient SIU
practices
Respond timely and completely
Does not adequately address
findings and recommendations
Cooperate with the auditors
Does not respond timely
40
First Line of Defense
Insurers are the first line of defense against
insurance fraud. We value our partnership
with the insurance industry. Together we
make a difference in the fight against
insurance fraud.
41
Thank You!
Narrated by:
James Hassan
Written by:
California Department of Insurance
Enforcement Branch – SIU Compliance Program
Produced by:
California Department of Insurance
Information Technology Division – Web Services Bureau
42