Baiting the Rat Trap: Recorded statements and 'EUOs'

Millie, a fraud examiner, was hired by a well-known insurance company once it suspected that an insured customer faked a serious back injury to file a claim and collect $1.5 million. The case was taken to court where Millie found the plaintiff sitting comfortably with his family during a one-hour recess. Using fraud examination techniques she had learned, Millie was able to catch the plaintiff in a lie. She questioned him in a way that led him to tell the court that his injury made it impossible for him to sit for long periods of time. Like Millie, you can learn how to bait a trap to catch insurance offenders before they claim more money.1 And the interview skills you'll acquire will help in all other types of fraud examinations.* 

In 2003, approximately 10 percent of all insurance claims paid nationwide were fraudulent. Though state and federal bureaus continue to post solid gains to prevent this, carriers cannot rely on the public sector alone to stand guard against this growing problem. Insurers must make their in-house anti-fraud measures a priority. The recorded statement and examination under oath (EUO) are the most important investigative tools available to the insurance industry for early detection of fraud or for building a case for denying coverage because of material misrepresentations or non-cooperation. If used effectively, these devices can lead the potential defrauder to his own demise like a rat to a trap. Fraud examiners of all stripes can use these tools to snare rodents in all areas of occupational fraud.

What is a recorded statement or EUO?
The purpose of the recorded statement, or the EUO, is to enable an insurance company to obtain all relevant information and material to a claim so the insurer can decide upon its obligations under a policy. A recorded statement is an informal proceeding, either by telephone or personal interview, with a recording device. The fraud examiner must tell the insured that the interview is being recorded. The recording from the interview usually will be transcribed. By contrast, an EUO is a formal proceeding during which an insured, while under oath and in the presence of a court reporter, is questioned by a representative of the insurer regarding the presented claim.

The authority to conduct a recorded statement or EUO is dependent on language in the policy. Most policies provide an insurer with a right to demand a statement. All questions considered material and relevant to the claim are within the scope of proper questioning and must be answered by the insured. Also, courts in most U.S. jurisdictions, including Pennsylvania, New Jersey, Delaware, and Florida, have upheld an insurer's right to contemporaneously examine a statement and any financial records, including tax and payroll records, when an insured's financial motive for committing fraud was at issue.

When can a recorded statement or EUO be taken?
There is no specific time that a recorded statement or EUO must be taken. An insurer may take a statement at any time after an insured makes a claim providing the insurer has a reasonable basis for requesting the statement. Insurers in New Jersey have more latitude in requesting a statement from an insured than in most jurisdictions. Typically, the insurer no longer has rights to a statement once benefits are terminated. A request for a statement is then viewed as a discovery tool and must be presented in accordance with the rules of the forum chosen to adjudicate the claim. However, the New Jersey Appellate Division held that, "Subject to ordinary standards of reasonableness and fairness, an automobile insurer is entitled to an EUO of a person who received or seeks to receive benefits, even if the insurer had previously terminated payments and even if the insured has demanded arbitration." N.J. Auto. Full Ins. Underwriting Ass'n v. Jallah, 256 N.J.Super. 134, 141 (App. Div. 1992).

Strategically, it's better to take the statement as early as possible, regardless of the jurisdiction in which the issuer presents the claim. The insurer is at a disadvantage the longer it waits because information can be lost, documents can be misplaced, or witnesses' recollections can fade. Also, an effective statement taken early in the claims process can bring a quick resolution to any potential issues. This can substantially cut the insurer's costs for protracted investigations and litigation.

A good rule of thumb is that the insurer should make arrangements to take the statement of an insured at the first sign of one or more red flags during the claims process. Some red flag examples include: (1) an insured reporting a claim or the beginning of treatment more than two to three weeks after the occurrence; (2) a hit-and-run or phantom vehicle with extremely limited identifying information; (3) multiple injured, unrelated passengers within the same vehicle being treated by the same doctor or represented by the same attorney; and (4) property in deteriorating condition or property that's heavily over-insured for its relative value.

Who's subject to a recorded statement or EUO?
The language of a policy determines who's subject to a statement. The named insured and all those persons who fall within the policy definition of "insured" must submit to a proper request for a recorded statement or EUO. Employees of the insured, agents of the insured, loss payees, or mortgagees can also be required to submit to statements. If the named insured is a corporate entity, any officer or employee with knowledge of the circumstances of the loss or damages may be compelled to appear.

When an insured assigns his rights under a policy to another party, such as a treating physician for the purpose of collecting the bill, an "assignment of benefits" is executed. Under an "assignment of benefits," the assignee is bound by the assignor's contract terms. The assignee-physician has no greater rights than the assignor-insured. So the assignee must comply with the contractual EUO and cooperation clauses before seeking benefits.

How to conduct a recorded statement or EUO
The initial step in conducting a recorded statement or EUO is giving proper notice to the insured of the insurer's intention to take a statement. The insured generally isn't obligated to give the statement until the insurer makes a request in writing. The written request must designate the time and location of the statement and the name of the fraud examiner conducting the statement. The statement must be scheduled at a mutually convenient time and place for the insured and insurer. If an insured is represented, the insurer must send proper notice to the insured's attorney. If the insurer denies an insured's right to legal representation at a recorded statement or EUO the insurer will be barred from denying a claim because of the insured's failure to comply. The insured's attorney may advise the insured and make appropriate objections to the form or scope of questions during the statement. However, the insured's attorney cannot offer information or testify on behalf of the insured. The insured's attorney also has no right to ask the examiner questions regarding the investigation. Any attempts by the insured's attorney to do so should be met with the reminder that the statement of the inusred is being taken, not the statement of the insured's attorney or the examiner.

In the next step, the fraud examiner begins the session with an introductory statement made on the record identifying whose statement is being taken, the date, time, place, and everyone present. If the insured has waived his right to have counsel present, this also should be put on the record. The fraud examiner should tell the insured that all answers he provides will be reproduced in a booklet form called a transcript. The fraud examiner should tell him that if there are any questions he cannot recall or give accurate answers to, he should let the fraud examiner know. This will prevent the insured from later claiming he was confused.

After the fraud examiner gives the introductory statement, he has considerable discretion in questioning the insured. However, he should follow some basic guidelines.

First, he should pay careful attention to the insured and his counsel and take note of any inconsistent, non-verbal cues, which may diminish the credibility of the insured - an important goal of the examination. The fraud examiner shouldn't be afraid to put any of these non-verbal cues on the record. For instance, in a case where an insured is claiming a back injury, the examiner should put on the record that the witness came in carrying a backpack, or was wearing high heels, or bent over to pick something up that was dropped on the floor. If the insured testifies that he's unable to sit for extended periods of time, at the end of the examination the fraud examiner should state on the record that the insured has remained seated during the entire three hours of questioning without getting up or requesting a break.

Second, the fraud examiner should ask open-ended questions. The principal goal of conducting a recorded statement or EUO is to gather information. The fraud examiner may let the insured ramble on rather than control him with narrow, focused questions. The fraud examiner is more likely to have the insured volunteer useful information if he asks questions in a broad, friendly, and informal manner. Also, in the open-ended question format the fraud examiner will learn what the insured doesn't know, which in most cases is equally as important as what the insured does know. An insured's response to an open-ended question in which he describes events and details in his own words will prevent him from adding to his testimony at a later trial. Also, frequently the fraud examiner has information at the time of a statement to which the insured isn't privy. The fraud examiner won't force the direction of the investigation by asking open-ended rather than leading questions.

Finally, after the examiner has allowed an insured to define the scope of his knowledge on the facts and issues in his own words through open-ended questions, it's important to follow up with questions specifically designed to pin the insured down. A common mistake is to allow a witness to offer ambiguous answers that don't disclose any details or qualified answers that state one thing but hedge toward another. The fraud examiner can prevent this by following up with focused questions that box the witness in on important information. The objective of every statement is to get the insured to provide meaningful testimony. If an insured resists any line of meaningful testimony, the fraud examiner must become creative in his questioning.

Using the recorded statement or EUO
Following the EUO or recorded statement, the insured should investigate all new information and leads. Request any further documents helpful to the resolution of the claim from the insured. It may be helpful to investigate any innocent explanations the insured provides to corroborate the entire testimony. Once the insurer concludes the investigation, obviously, it should make a coverage decision. This decision should objectively consider all relevant and material information. If the insurer makes a coverage decision without gathering and considering as much relevant and material information, the insured can argue that the insurer had already made a coverage decision in bad faith without conducting an investigation. Additionally, before the recorded statement or EUO, the adjuster should be careful to not take any early notes in the file on how a claim should be decided. These notes and opinions can be used later to argue that the adjuster never intended to conduct an objective investigation in good faith and gather all necessary information before making a coverage decision.

After completing a statement, the fraud examiner can provide a report to the insurance company which should contain: (1) an assessment of the credibility of the witness; (2) a summary of the facts learned; (3) an analysis of the testimony in terms of the insurer's rights and obligations under the policy; and (4) a statement about any follow-up measures that should be taken. It's advisable to have the insurance company's counsel in the recorded statement (if not conducted over the telephone) or EUO session. An attorney can assist in handling tactics thrown by the insured, such as inappropriate assertions of privilege, or his counsel, such as obstreperous objections.

Powerful weapons
Like the unsuspecting rat led to the trap, if used timely and effectively, the recorded statement and examination under oath can be powerful weapons to thwart fraud or limit an insurer's exposure under any claim. They're also good tools for all fraud examiners in catching the rats.

* This fictitious case is for illustrative purposes. 

Douglas Alba, Esquire, and Jack Senechal, Esquire, are associates in the Cherry Hill, N.J., office of Marshall, Dennehey, Warner, Coleman & Goggin.